We investigate the long-term equilibrium relationship between Australian dollar bonds of different credit quality. Contrary to the expectations hypothesis, we find the yields of Eurobonds are not cointegrated with the equivalent maturity Government bond. Nevertheless, the results suggest that the yields of the different risk classes of Eurobonds are cointegrated with one another, with the higher-rated bond yields tending to lead the lower-rated yields. The paper also demonstrates that the cointegration relationship can be utilised in modelling the dynamics of the spread changes between Eurobonds and Government bonds.
|Number of pages||16|
|Journal||International Review of Financial Analysis|
|Publication status||Published - Dec 2000|
- Credit spreads
- Equilibrium correction