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Valuing Credit Spreads on Quality Australian Dollar Eurobonds in a Multivariate EGARCH Framework

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  • Jonathan Batten
  • Warren Hogan
  • Francis In

Abstract

We apply a multivariate EGARCH model implied from the closed‐form valuation model of Longstaff and Schwartz (1995), to explain the time‐varying volatility of credit spreads on high‐quality Australian dollar Eurobonds with different maturities. The results support the proposition that relative credit spreads returns are negatively related to both changes in Australian Government bond yields and changes in the All Ordinaries Index. There is also evidence of a high level of volatility interaction and persistence between Australian dollar Eurobonds, though the volatility transmission mechanism is asymmetric in that negative innovations tend to increase the volatility in other bonds more than positive innovations.

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  • Jonathan Batten & Warren Hogan & Francis In, 2002. "Valuing Credit Spreads on Quality Australian Dollar Eurobonds in a Multivariate EGARCH Framework," Australian Economic Papers, Wiley Blackwell, vol. 41(1), pages 115-128, March.
    • Handle: RePEc:bla:ausecp:v:41:y:2002:i:1:p:115-128
    DOI: 10.1111/1467-8454.00153
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    1. Batten, Jonathan & Hogan, Warren, 2002. "A perspective on credit derivatives," International Review of Financial Analysis, Elsevier, vol. 11(3), pages 251-278.

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