Scaling the volatility of credit spreads: Evidence from Australian dollar eurobonds

Jonathan Batten*, Craig Ellis, Warren Hogan

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)

Abstract

The linear rescaling of the variance of an asset's return is used by many asset pricing models when an annualised risk coefficient is required. However, this approach may not be appropriate for time series, which are not independent and identically distributed (IID). This paper investigates the scaling relationships for daily credit spreads, from January 1995 to May 1998, between AAA-, AA-, and A-rated Australian dollar denominated Eurobonds with maturities of 2, 5, 7, and 10 years. The credit spread return all display similar scaling properties with the estimated standard deviation, based upon a scaling at the square root of time, significantly underestimating the actual level of risk predicted from a normal distribution. These results have implications for risk managers and trading of credit spread instruments.

Original languageEnglish
Pages (from-to)331-344
Number of pages14
JournalInternational Review of Financial Analysis
Volume11
Issue number3
DOIs
Publication statusPublished - 2002

Keywords

  • Credit derivatives
  • Dependent time series
  • Scaling relationships
  • Volatility

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