Expectations and Equilibrium in High-Grade Australian Bond Markets

Francis In () and Jonathan Batten
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Francis In: Department of Accounting and Finance, Monash University, Clayton Campus, Victoria 3168, Australia

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2005, vol. 08, issue 04, 573-592

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.

Keywords: Long-run relationship; expectations hypothesis; Australian dollar Eurobonds; Canonical Cointegrating Regression; GARCH; JEL Classification: G10; JEL Classification: G15; JEL Classification: C22 (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (1)

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DOI: 10.1142/S0219091505000543

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