Managing Risk in Sovereign Bond Portfolios: The Impact of Sovereign and Call Risks on Duration

Yan Alice Xie, Jot Yau and Hei Wai Lee

A chapter in International Financial Markets, 2014, vol. 13, pp 109-124 from Emerald Group Publishing Limited

Abstract: The study examines the joint effect of sovereign and call risks on the duration of callable sovereign bonds over the period 1996–2011. The results indicate that the sovereign risk-adjusted duration is significantly shorter than its Macaulay counterpart for U.S. dollar-denominated investment-grade callable sovereign bonds. Further, the “shortening” effect of sovereign and call risks on duration is generally stronger among bonds of lower ratings. Similar results are obtained when CDS prices are used as a proxy for changes in sovereign risk. Results from this study emphasize the importance of considering the joint effect of sovereign and call risks in managing the interest rate risk exposure in fixed income investments.

Keywords: Sovereign risk; call risk; duration; yield spreads; G12; G15 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:eme:fegzzz:s1574-8715(2013)0000013011

DOI: 10.1108/S1574-8715(2013)0000013011

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