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Coupon Effects and the Pricing of Japanese Government Bonds: An Empirical Analysis

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  • Marti G. Subrahmanyam
  • Young Ho Eom
  • Jun Uno

Abstract

In many markets, the term structure of interest rates implied by coupon Treasury bonds provides a key input for pricing and hedging interest rate-sensitive securities. Previous studies in the Japanese market, however, suggest that the prices of the Japanese Government Bonds (JGB's) were significantly affected modelling in the Japanese context bases on interest rate factors could leave to misleading results. Since the previous studies, there have been significant structural changes in the regulatory environment, and in the liquidity of the Japanese bond market in the 1990's. In this light, we examine the effect of these changes on the JGB prices during the period between 1990 and 1996, by analyzing the term structure of interest rates in the JGB market over time. Specifically, we use the B-spline method to fit the term structure of interest rates using weekly prices of "non-benchmark" ten-year JGB's. We also use a non-linear econometric model to examine the significance of the "coupon" effects, which are the results of regulatory, accounting and liquidity factors.

Suggested Citation

  • Marti G. Subrahmanyam & Young Ho Eom & Jun Uno, 1998. "Coupon Effects and the Pricing of Japanese Government Bonds: An Empirical Analysis," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-078, New York University, Leonard N. Stern School of Business-.
  • Handle: RePEc:fth:nystfi:98-078
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    File URL: http://www.stern.nyu.edu/fin/workpapers/wpa98078.pdf
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    Cited by:

    1. Linton, Oliver & Mammen, Enno & Nielsen, Jans Perch & Tanggaard, Carsten, 2001. "Yield curve estimation by kernel smoothing methods," Journal of Econometrics, Elsevier, vol. 105(1), pages 185-223, November.
    2. de Jong, Abe & Roosenboom, Peter & Schramade, Willem, 2006. "Bond underwriting fees and keiretsu affiliation in Japan," Pacific-Basin Finance Journal, Elsevier, vol. 14(5), pages 522-545, November.
    3. Brock Johnson & Jonathan Batten, 2003. "Forecasting Credit Spread Volatility: Evidence from the Japanese Eurobond Market," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 10(4), pages 335-357, December.
    4. Dufour, Alfonso & Stancu, Andrei & Varotto, Simone, 2017. "The equity-like behaviour of sovereign bonds," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 48(C), pages 25-46.
    5. Andreas Rathgeber & David Rudolph & Stefan Stöckl, 2015. "Pricing anomaly at the first sight: same borrower in different currencies faces different credit spreads—an explanation by means of a quanto option," Review of Derivatives Research, Springer, vol. 18(2), pages 107-143, July.

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