Dynamic interaction and valuation of quality yen Eurobonds in a multivariate EGARCH framework

Jonathan Batten and Francis In

Applied Financial Economics, 2006, vol. 16, issue 12, 881-892

Abstract: This study applies a multivariate EGARCH model, developed from the closed-form valuation model of Longstaff and Schwartz (1995), to explain the time-varying volatility of credit spreads on AAA and AA rated yen Eurobonds with different maturities. While the results support the theoretical proposition that relative credit spreads returns are negatively related to both changes in Japanese Government Bond (JGB) yields and changes in the Nikkei 225 Index, the key innovation of this study is that there is also evidence of a high level of volatility interaction and persistence between yen Eurobonds. However the volatility transmission mechanism is asymmetric in that negative innovations tend to increase the volatility in other bonds more than positive innovations.

Date: 2006
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DOI: 10.1080/09603100600684757

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