Expectations and equilibrium in high-grade Australian bond markets

Francis In*, Jonathan A. Batten

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)

Abstract

This paper examines the equilibrium implications of the Expectations Hypothesis of term structure to different maturities of high-grade Australian dollar denominated Eurobonds and Australian Government bonds (AGBs) using the Canonical Cointegrating Regression (CCR) technique developed by Econometrica 60 (1992) 119. Our findings provide evidence only for equilibrium relationships between each group of bonds based on credit class, but not between any of the subsets of AGBs and the Eurobonds. Furthermore, the error correction model supports theory with the most liquid, long-term 10-year AGB driving the AGB term structure, with short-term yields adjusting to movements in the long-run yields, though the opposite is true for Eurobonds. The lesson for markets is to simplify the risk management task. Managers are advised to treat portfolios of equivalent credit class separately for hedging and risk management.

Original languageEnglish
Pages (from-to)573-592
Number of pages20
JournalReview of Pacific Basin Financial Markets and Policies
Volume8
Issue number4
DOIs
Publication statusPublished - Dec 2005

Keywords

  • Australian dollar Eurobonds
  • Canonical Cointegrating Regression
  • Expectations hypothesis
  • GARCH
  • Long-run relationship

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