Expectations and Liquidity in Yen Bond Markets

Seppo Pynnönen, Warren Hogan and Jonathan Batten

Journal of the Asia Pacific Economy, 2002, vol. 7, issue 3, 335-354

Abstract: The relationship between daily yields on Japanese government bonds (JGBs), and high grade (AA and AAA) yen eurobonds is investigated. We find the cointegration vector differs slightly from the expected order predicted by the expectations hypothesis and attribute this to differing degrees of liquidity in the eurobond and JGB markets. We conclude that the concentration of new Japanese government issues in maturities of five to ten years, combined with the practice by the authorities of holding a significant amount of outstanding bonds, has distorted the transmission process between different risk classes of bonds. An example of the dynamics of the credit spread on the ten-year AA eurobond is provided.

Date: 2002
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DOI: 10.1080/1354786022000007870

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