• Selected
• Entire List

Abstract:
This study investigates the multi-period prediction of firm bankruptcy as a multi-alternative problem of Statistical Decision Theory. This approach enables a simultaneous assessment to be made of the prediction of bankruptcy and the time horizon at which the bankruptcy could occur. To illustrate the approach, using U.S. bankruptcy data, a comparative statistical analysis of various financial variables is undertaken to identify four relatively independent financial ratios that have the potential for multi-period bankruptcy forecasting. These ratios characterize the quantity and quality of debt, as well as the firm's ability to repay the debt. The study also investigates a new type of predictive information - the maturity schedule of a firm's long-term debt. Bayesian-type forecasting rules are developed that jointly use the financial ratios and maturity schedule factors. The rules noticeably enhance bankruptcy prediction compared with the familiar one-period (two-alternative) Z-score rules of Altman (1968) for bankruptcy within the first one, two or three years. Predictive factors derived from schedule information additionally enhance bankruptcy prediction at distant time horizons.

Abstract:
Analysis of flow of funds data provides evidence of gradual disintermediation in Japan's financial system, however the major channel for the allocation of domestic savings to productive assets remains bank intermediated lending. Consistent with earlier proposals by Schinasi and Smith (1998) and Rhee (2001), we argue that developing a viable domestic bond market is critical for the allocation of excess liquidity, and the on-going health of the Japanese economy. Specific recommendations examined include: (i) the removal of regulation which limits access to the underwriting and trading process; (ii) reducing the concentration of market power in the hands of banks; (iii) encouraging a broader investment choice by Japanese investors including households and institutional investors; (iii) improving infrastructure for the issuing and trading of securities; (iv) promoting the issuance of debt securities among potential domestic borrowers; (v) encouraging non-resident borrowers to tap the pool of Japan's excess domestic savings through domestic bond issues; and finally (vi) encouraging further internationalization of the yen, since there is a lack of yen funding requirements by foreign firms.

Bond Markets, Financial System Reform, Japan

Abstract:
We investigate the yield spread between Thai Government bonds issued in the US domestic market and US Treasury bonds to determine the long-term equilibrium dynamics and the extent that interest rate and asset factors affect changes in credit spreads. The results suggest that the long-term equilibrium relationship holds only between Thai bonds and long-term US bonds rather than shorter or equivalent maturity bonds. Also a GARCH (1,1) specification, to accommodate the time-varying volatility structure, suggests credit spreads of Thai Government bonds are negatively related to changes in the Thai SET Index. Changes in US Treasury bonds also equally affect these spreads, albeit negatively for short-term bonds, and positively for long bonds.

Abstract:
We investigate the volatility structure of gold, trading as a futures contract on the Chicago Board of Trade (CBOT) using intraday (high frequency) data from January 1999 to December 2005. Apart from investigating the now familiar GARCH properties we also utilize a rarely used measure of volatility - the Garman Klass estimator - to provide new insights in intraday and interday volatility. This nonparametric measure incorporates the open, close, high and low price within a particular time interval. Both sets of results suggest significant variation across the trading day and week consistent with microstructure theories, although volatility is only slightly positively correlated with volume when measured by tick-count.

Gold, volatility, intraday, GARCH

Abstract:
When distributions are non-Gaussian or display linear dependence it may not be appropriate to annualise the risk coefficient determined by the linear rescaling of the variance from other time intervals. This paper investigates the scaling relationships for daily spot foreign currency returns: the Deutsche mark-U.S. dollar (DMK/USD), the Swiss franc-USD (SWF/USD), the Japanese yen-USD (JPY/USD), and the English pound-USD (GBP/USD), from February 1985 to May 1998. We find that all four series were non-Gaussian and displayed similar scaling properties with the estimated variance, based upon a scaling at the square root of time, significantly underestimating the actual level of risk predicted from a normal distribution. The economic implications of these results were then established by estimating the premiums on a series of foreign currency options using a variation of a Black-Scholes model with varying strike prices. Based on a 180 day maturity, the results suggested that the inappropriate scaling of risk underestimated the price of call and put options for DMK/USD, SWF/USD and JPY/USD, but not for GBP/USD.

Abstract:
We investigate daily variations in credit spreads on investment grade Deutschemark-denominated Eurobonds during the challenging 1994 to 1998 period. Empirical results from a Longstaff and Schwartz (1995) two-factor regression, extended for correlated spread changes and heteroskedasticity, indicate strong persistence in spread changes. Consistent with theory and previous findings, changes in spreads are significantly negatively related to the term structure level while, contrary to theory, the proxy for asset value does not yield a significant negative contribution. We even find a significant positive relation for Eurobonds with long maturity and interpret this as consistent with portfolio rebalancing activities (where long maturity high quality bonds are sold for stocks) or with factor risk premiums on corporate bonds, which may temporarily dominate default risk.

Credit spreads, bond ratings, spread prediction

Abstract:
Many asset pricing models require an annualised risk coefficient which is determined by the linear rescaling of the variance from other time intervals. However, this approach may not be appropriate for dependent time series. This paper investigates the scaling relationships for daily credit spreads, from January 1986 to May 1998, between AAA, AA and A rated Australian dollar denominated Eurobonds with maturities of 2, 5, 7 and 10 years. We find evidence of a term structure and co-movement in credit spreads by maturity. We also find the credit spread return series were time variant, leptokurtic, autocorrelated and exhibited different degrees of negative long-term dependence. The series all displayed similar scaling properties with the estimated standard deviation, based upon a scaling at the square root of time, significantly underestimating the actual level of risk predicted from a normal distribution. These results have implications for credit spread derivatives.

Abstract:
This study investigates the sensitivity of the long-term return anomaly observed on the Nikkei stock index to sample and method bias using daily data from the period 3 January 1980 to 31 October 2000. Initially, the CUSUM statistic is employed to identify sub-periods of sign shifts in the mean returns. We find that the null hypothesis of no long-term dependence is accepted for the whole sample and every sub-period using the modified rescaled range test, but not using the classical rescaled adjusted range test. We conclude that researchers may inadvertently introduce sample and method bias into their studies of the time series properties of the Nikkei unless sample period and method are considered.

Long-term dependence, Return Anomalies, CUSUM, Rescaled-range statistic, Hurst statistic

Abstract:
We investigate the price spread between gold and silver trading as a futures contract on COMEX. Although the correlation between gold and silver returns during this period was high we find evidence of time varying long term dependence in the spread, with the positive dependent relationship dominant. This last finding suggests limited opportunity to profit from strategies based on mean reversion of the spread.

Long term dependence, volatility, gold silver spread, futures

Abstract:
Since the 1997 financial crisis many East Asian economies have attempted to realign their financial systems to prevent future crises and provide financial mechanisms for sustainable long-term development. This paper examines the financial system development of select Asia-Pacific countries before, during and immediately after the crisis. The relative positioning of corporate borrowers is also examined. Surprisingly, despite the range of reforms, the region's financial development position has generally suffered a slight decline. Corporate sector development has generally improved, except in Japan, where significant government issues, in domestic markets, appear to have crowded-out the corporate investment market.

Asia-Pacific, finance, financial development, banking, equity markets, bond markets

Abstract:
Employing a panel data modelling technique, we provide the answers to two critical research questions: what is the linkage between FDI and economic growth and does this relationship change under different legal, institutional, educational and economic conditions? Overall the analysis supports the view that FDI has a stronger positive impact on economic growth in countries with a higher level of education attainment, openness to international trade and stock market development, and a lower rate of population growth and lower level of risk. Thus countries undertaking reform of cross-border capital restrictions and controls and other policy aimed at encouraging domestic and foreign investment need to incorporate broader social policy objectives - such as education, legal and institutional reform - to maximise the benefits from FDI.

foreign direct investment, economic growth, panel data, social policy

Abstract:
Employing a panel data modelling technique, we provide the answers to two critical research questions: what is the linkage between FDI and economic growth and does this relationship change under different legal, institutional, educational and economic conditions? Overall the analysis supports the view that FDI has a stronger positive impact on economic growth in countries with a higher level of education attainment, openness to international trade and stock market development, and a lower rate of population growth and lower level of risk. Thus countries undertaking reform of cross-border capital restrictions and controls and other policy aimed at encouraging domestic and foreign investment need to incorporate broader social policy objectives - such as education, legal and institutional reform - to maximise the benefits from FDI.

foreign direct investment, economic growth, panel data, social policy

Abstract:
This study investigates the development of Korea's foreign bond (Arirang) market for won-denominated foreign bonds. We provide an institutional perspective and discuss the problems, concerns and key issues related to the development of this market. We find no evidence that Arirang issuance either crowded out local debt or had exchange rate implications. Overall, the Korean experience provides valuable lessons for other emerging nations seeking to build bond markets for local and foreign issuers. Instigating market development demands an enabling infrastructure, the nurturing of local and international demand and the deregulation of capital flows. This process is demanding, as the sophistication of the local bond market does not make it appealing to foreign borrowers per se.

Arirang bonds, foreign bonds, bond market development

Abstract:
Using a daily time series from 1983 to 2005 of currency prices in spot and forward USD/Yen markets and matching equivalent maturity short term US and Japanese interest rates, we investigate the sensitivity over the sample period of the difference between actual prices in forward markets to those calculated from short term interest rates. According to a fundamental theorem in financial economics termed covered interest parity (CIP) the actual and estimated prices should be identical once transaction and other costs are accommodated.

The paper presents four important findings: First, we find evidence of considerable variation in CIP deviations from equilibrium that tends to be one way and favours those market participants with the ability to borrow US dollars (and subsequently lend yen). Second, these deviations have diminished significantly and by 2000 have been almost eliminated. We attribute this to the effects of electronic trading and pricing systems. Third, regression analysis reveals that interday negative changes in spot exchange rates, positive changes in US interest rates and negative changes in yen interest rates generally affect the deviation from CIP more than changes in interday volatility. Finally, the presence of long-term dependence in the CIP deviations over time is investigated to provide an insight into the equilibrium dynamics. Using a local Hurst exponent - a statistic used in fractal geometry - we find episodes of both positive and negative dependence over the various sample periods, which appear to be linked to episodes of dollar decline/yen appreciation, or vice versa. The presence of negative dependence is consistent with the actions of arbitrageurs successfully maintaining the long-term CIP equilibrium. Given the time varying nature of the deviations from equilibrium the sample period under investigation remains a critical issue when investigating the presence of longterm dependence.

Hurst exponent, Efficient market hypothesis

Abstract:
We investigate key macroeconomic factors that impact the price returns of precious metals markets over a 20 year period. The markets investigated are gold, silver, platinum and palladium; whereas the macroeconomic factors accommodated business cycle, monetary environment and financial market sentiment factors. The key findings present limited evidence that the same macroeconomic factors jointly influence the volatility processes of the precious metal price series, although there is some evidence of volatility feedback between the precious metals. This finding lends weight to views that individual commodities are too distinct to be considered a single asset class or represented by a single index; a finding of considerable importance for portfolio managers and investors.

Commodities, Gold, Macroeconomic factors, Silver, Volatility, conditional

Abstract:
This study investigates the yield spread between Thai Government bonds issued in the US domestic market ("yankee" bonds) and US Treasury bonds to determine the long-term equilibrium dynamics and the factors that affect changes in credit spreads. The sample period investigated was from 5 May 1999 to 26 March 2002. The results suggest that the long-term equilibrium relationship holds only between Thai Yankee bonds and long-term US bonds, rather than shorter or equivalent maturity bonds. Also, changes in the credit spreads of Thai Yankee bonds are generally negatively related to changes in the Thai SET Index. Changes in US Treasury bonds also tend to negatively affect spreads on short Thai Yankee bonds and positively affect spreads on long Thai Yankee bonds, though other macroeconomic factors, including exchange rate and capital flow variables, were generally not important.

Abstract:
Recent financial market reform undertaken by East Asian policymakers has focused on facilitating corporate bond market development. McCauley and Park (2006) note that this vision encompasses three perspectives: a regional bond market denominated in regional currencies; a series of domestic markets; and finally a global market where national bond markets are developed with the ultimate objective of integration into a global market. Enhancing global integration requires greater foreign participation in the domestic markets (Burger and Warnock, 2006a) that includes the issuance activities of Multilateral Development Banks (Hoschka, 2005) and international corporations, as well as an expanded role for foreign investors (Bae, Yun and Bailey, 2006) in domestic markets, as well as more issues by domestic issuers in international markets.

The objective of this study is to investigate some of the key empirical features of Thai international bond issues that may impede and enhance international bond issuance and to then propose ways of further enhancing this market. Specifically we focus upon bond return volatility and skewness as an impediment to involvement by international investors in domestic bond markets. Nonetheless, empirical analysis highlights the time-varying nature of variance and skewness of bond returns, which can only be overcome through government policy that focuses upon stabilizing the macroeconomic environment and not simply enhancing domestic and regional infrastructure.

Bond Market, Thailand, Asia, currency, Capital Flow

Abstract:
The correlation between interest rates and corporate bond yield spreads is a well-known feature of structural bond pricing models. Duffee (1998) argues that this correlation is weak once the effects of call options are removed from the data; a conclusion that contradicts the negative correlation expected by Longstaff and Schwartz (1995). However, Elton et al. (2001) point out that Duffee's analysis ignores the effects of the tax differential between U.S. Treasury and corporate bonds. Canadian bonds have no such tax differential, yet, after controlling for callability, the correlation between riskless interest rates and corporate bond spreads remains negligible. We also find a significant negative relationship for callable bonds that increases with the moneyness of the call provision. These results are robust under alternate empirical specifications. Our results therefore provide support for reduced-form models that explicitly define a default hazard process and untie the relation between the firm's asset value and default probability.

Bond Yield Spread, Default Risk, Callable Bonds, Corporate Bonds

Abstract:
Understanding the long term relationship between the yields of risky and riskless bonds is a critical task for portfolio managers and policy makers. This study specifies an equilibrium correction model of the credit spreads between Japanese Government bonds (JGBs) and Japanese yen Eurobonds with high quality credit ratings. The empirical results indicate that the corporate bond yields are cointegrated with the otherwise equivalent JGB yields, with the spread defining the cointegration relation. In addition the results indicate that the equilibrium correction term is highly statistically significant in modelling credit spread changes. Another important factor is the risk-free interest rate with the negative sign, while there is little evidence of the contribution of the asset return to the behaviour of spreads.

Abstract:
This study specifies an equilibrium correction model of the credit spreads on quality Japanese yen Eurobonds. In an important paper Longstaff and Schwartz (1995) derive a closed form solution of the arbitrage-free value on risky debt in continuous time. However, in discrete time real world data series it is common that many economic and financial nonstationary time series are cointegrated. Nevertheless, until now there is no theory for continuous time cointegration. In addition the existence of cointegration leads to incomplete markets so that the arbitrage-free valuation should not apply. Instead, one must rely on equilibrium pricing, where the markets clear in the equilibrium via a potentially complicated adjusting process. In this paper the important factors driving the credit spreads are introduced into the equilibrium relation and the adjusting process are investigated. The empirical results indicate that the corporate bond yields are cointegrated with the otherwise equivalent Japanese Government Bond (JGB) yields, with the spread defining the cointegration relation. Furthermore, the results indicate that the equilibrium correction term is highly statistically significant in modelling spread changes. The other important factor is the risk-free interest rate with the negative sign as predicted by the Longstaff and Schwartz (1995). On the other hand there is little evidence of the contribution of the asset return to the spread behaviour. The estimated coefficient of the equilibrium correction term indicates that the adjustment process is fairly slow, which indicates that the clearing process in the markets takes time.

Credit Spreads, Eurobonds, Japan, Equilibrium Correction

Abstract:
We examine the recent development of the foreign bond market - termed Kangaroo bonds - in Australia. Initially, a perspective is provided on the scale and scope of this market with particular attention paid to the characteristics of issuers. Overwhelmingly, this market is high credit quality and comprises sovereign, supranational, and major international financial institutions. Local institutional investors appear to have a preference for simple fixed-rate pricing structures; issuers then swap Australian dollar-denominated bond proceeds into the currency and coupon type of choice. There are two key features of this market which have facilitated its development: first, the highly liquid Australian foreign exchange and derivatives markets facilitate risk transformation; and second, enabling regulation has emphasized cooperation with market participants to maintain liquidity in benchmark issues and competitive pricing.

Bond Markets, Financial Market Development, Foreign Bonds, Kangaroo Bonds, Australia

Abstract:
Using a daily time series from 1983 to 2005 of spot and forward USD/Yen prices and the equivalent maturity short term US and Japanese interest rates, we investigate the sensitivity over time of the difference between actual prices in forward markets and those calculated based upon covered interest parity (CIP). The paper presents four important findings: First, we find evidence of considerable variation in CIP deviations from equilibrium over the sample period that tend to be one way and favour those with the ability to borrow US dollars. Second, these deviations have diminished significantly and by 2000 have been almost eliminated. We attribute this to the effects of electronic trading and pricing systems. Third, regression analysis reveals that interday negative changes in spot exchange rates, positive changes in US interest rates and negative changes in yen interest rates generally affect the deviation from CIP more than changes in interday volatility. Finally, the presence of long-term dependence in the CIP deviations over time is investigated to provide an insight into the equilibrium dynamics. Using a local Hurst exponent - a statistic used in fractal geometry - we find episodes of both positive and negative dependence over the various sample periods, which appear to be linked to episodes of dollar decline/yen appreciation, or vice versa. The presence of negative dependence is consistent with the actions of arbitrageurs successfully maintaining the long-term CIP equilibrium. Given the time varying nature of the deviations from equilibrium the sample period under investigation remains a critical issue when investigating the presence of long-term dependence.

Hurst exponent, efficient market hypothesis, covered interest parity, arbitrage

Abstract:
The compass rose pattern appears in high-frequency returns of spot electricity prices. Once these returns are filtered using autoregressive filtering, no pattern remains. This is unexpected and suggests that factors other than discreteness contribute to the compass rose pattern. Though the series are non-normal in terms of their distribution, statistical tests fail to identify significant chaotic, or fractal structures, in price returns. The phase diagram of the filtered returns provides a useful visual check on independence, a property necessary for pricing and trading derivatives and portfolio construction, as well as providing useful insights into the market dynamics.

chaos, compass rose, electricity prices, fractal, high-frequency data, Hurst

Abstract:
We consider recent events in financial markets and the subsequent responses by monetary and fiscal authorities, which are impressive for their scale, innovation and flexibility in the face of sharply deteriorating circumstances. Internationally, the economic malaise has brought perverse responses not least being the apparent quest for higher capital adequacy requirements than was thought necessary before the downturn. Immediately this places the need for yet more comprehensive steps to relieve the burden of impaired assets on operating banks if those banks are to contribute additional funding to the real sectors of the global economy. The uniqueness of the responses by authorities in the Asia-Pacific region are highlighted as are the outcomes, which depart significantly from those experienced during the 1997-1998 Asian Crisis. Other features impeding recovery cannot be dealt with immediately. Amongst these the most important is the valuation procedures associated with accounting rules.

financial crisis, Asia-Pacific region, economic policy, international banking and bond markets

Abstract:
The correlation between interest rates and corporate bond yield spreads is a well-known feature of structural bond pricing models. Duffee (1998) argues that this correlation is weak once the effects of call options are removed from the data; a conclusion that contradicts the negative correlation expected by Longstaff and Schwartz (1995). However, Elton et al. (2001) point out that Duffee's analysis ignores the effects of the tax differential between U.S. Treasury and corporate bonds. Canadian bonds have no such tax differential, yet, after controlling for callability, we find that the correlation between interest rates and corporate bond spreads remains negligible. We also find a significant negative relationship for callable bonds with this relationship increasing with the moneyness of the call provision. These results are robust under alternate empirical specifications.

Bond Yield Spread, Default Risk, Callable Bonds, Corporate Bonds

Abstract:
We investigate two important relationships using the most liquid and option-free, sovereign Eurobond issues of major Latin American economies: the determinants of credit spread changes using variables derived from structural and macroeconomic theory; and the impact of a default episode on the underlying equilibrium dynamics of credit spreads.

We find four significant determinants that drive the credit spreads in these markets: an asset and interest rate factor - consistent with structural models of credit spread pricing; exchange rate factors - consistent with macroeconomic determinants and the slope of the yield curve - consistent with a business cycle effect.

The statistical significance of the exchange rate factor, which also proxies for country risk and the slope variable may be attributed to the sovereign risk premium demanded by investors before buying these bonds. We also find significant autoregressive moving average (ARMA) effects when modelling spread returns indicating a degree of inertia associated with the pricing of sovereign credit spreads in these emerging markets.

Finally, an intra-regional analysis of sovereign yields reveals a shift in the long run equilibrium dynamics around the Argentine default on the 23rd of December 2001. Specifically there was a decline in the importance of the cross border cointegration relationship: intramarket relationships have become more important than intermarket (bivariate or pairwise) relationships.

Credit spreads, Latin America, Long-run dynamics, Sovereign bonds, Structural models

Abstract:
While the domestic bond markets of Asia-Pacific have grown considerably since the Asian Financial Crisis of 1997, it is clear that they remain undeveloped relative to the region’s weight in the world economy. This paper adds to the policy debate on this issue by proposing that in order to encourage further development in these markets, regulators should make them more accessible to foreign borrowers.

We offer insights into the nature and mechanics of foreign bond issuance in domestic markets by investigating the key characteristics of 3,132 foreign bonds issued in 14 countries (other than the US) between 1928 and June 2009. We find that the foreign borrowers that tap domestic markets are overwhelmingly high credit quality and comprise sovereigns, supranationals, and major financial institutions. Although there is a significant corporate presence, usually by non-bank financial institutions, issuance by this sector tends to have a shorter maturity and generally carry lower credit ratings. There is a preference for simple fixed-rate payment structures, which can then be swapped into the currency and coupon type of choice using currency and interest rate derivatives. On the whole, the long-term viability of foreign bond markets appears to be linked to the presence of highly liquid foreign exchange and derivatives markets that facilitate risk management and transformation, enabling regulation that facilitates cooperation with market participants, the presence of benchmark issues, and competitive pricing between alternate market segments.

Markets, Financial Market Development, Foreign Bonds

Abstract:
We investigate daily variations in credit spreads on investment-grade Deutschemark-denominated Eurobonds during the challenging 1994-1998 period. Empirical results from a Longstaff and Schwartz (1995) two-factor regression, extended for correlated spread changes and heteroskedasticity, indicate strong persistence in spread changes. Consistent with theory and previous findings, changes in spreads are significantly negatively related to the term-structure level while, contrary to theory, the proxy for asset value does not yield a significant negative contribution. We even find a significant positive relation for Eurobonds with long maturity. Tentative interpretations are portfolio-rebalancing activities or differing risk factor sensitivities on short vs. long-maturity bonds.

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.

Abstract:
This study contrasts the development of the Republic of Korea's market for won-denominated foreign bonds (Arirang) with similar markets in the Asia-Pacific region. It discusses the problems, concerns, and key issues related to the development of this market within the broader context of domestic, regional, and global bond market development. Korea's experience provides valuable lessons for other emerging market economies also seeking to build bond markets for local and foreign issuers. The sophistication of the local bond market is not enough to make it appealing to foreign borrowers. Market development demands ensuring an enabling infrastructure and a background of macroeconomic stability, nurturing local and international demand, deregulating capital flows, and minimizing exchange restrictions.

F34, G18

Abstract:
This study investigates the sensitivity of the long-term return anomaly observed on the Nikkei stock index to sample and method bias using daily data from the period 3 January 1980 to 31 October 2000. Initially, the CUSUM statistic is employed to identify sub-periods of sign shifts in the mean returns. We find that the null hypothesis of no long-term dependence is accepted for the whole sample and every sub-period using the modified rescaled range test, but not using the classical rescaled adjusted range test. We conclude that researchers may inadvertently introduce sample and method bias into their studies of the time series properties of the Nikkei unless sample period and method are considered.

Long-term dependence, Return Anomalies, CUSUM, Rescaled-range statistic, Hurst statistic, Nikkei

Abstract:
Recent theoretical models including the closed-form valuation model of Longstaff and Schwartz (1995) predict that credit spreads are driven by both an asset and interest rate factor. In empirical studies the credit spread may be expressed as either the difference between, or ratio of, the risky bond to a riskless bond. Using a daily sample of non-callable Australian dollar denominated Eurobonds it is found, consistent with theory, that changes in credit spreads are negatively related to both changes in the return on All Ordinaries stock Index and changes in the Government bond yield. Interestingly, the ratio measure - termed a relative credit spread - tends to be statistically more significant than the alternate measure based upon the difference - termed an actual credit spread. However, it is shown that this result is spurious and due to the way in which relative credit spreads are constructed. Noting Duffee's (1998) warning against using callable bonds, the use of only non-callable Eurobonds provides a cleaner result when compared with tests conducted by Longstaff and Schwartz (1995).

Credit spreads, absolute spreads, relative spreads, Eurobonds

Abstract:
The local Hurst exponent, a measure employed to detect the presence of dependence in a time series, may also be used to investigate the source of intraday variation observed in the returns in foreign exchange markets. Given that changes in the local Hurst exponent may be due to either a time-varying range, or standard deviation, or both of these simultaneously, values for the range, standard deviation and local Hurst exponent are recorded and analyzed separately. To illustrate this approach, a high-frequency data set of the spot Australian dollar/U.S. dollar provides evidence of the returns distribution across the 24-hour trading 'day', with time-varying dependence and volatility clearly aligning with the opening and closing of markets. This variation is attributed to the effects of liquidity and the price-discovery actions of dealers.

Scaling volatility, long-range dependence, foreign exchange, market microstructure

Abstract:
Analysis of flow of funds data provides evidence of gradual disintermediation in Japan's financial system, but the major channel for the allocation of domestic savings to productive assets remains bank intermediated lending. Overall, the Japanese financial system is still bank dominated, with the lending patterns of the past decade bearing witness to the adverse selection and moral hazard problems that may arise from a market overly reliant on intermediated financing. This study recommends further development of Japan's corporate bond market with improved access by foreign participants including borrowers, investors and investment banks.

Bond Markets, Financial System Reform, Japan

Abstract:
The recent financial crises in Asia and Russia have shown that emerging European economies, due to their strong dependence on foreign capital, are highly vulnerable to the excessive volatility of international capital flows. Those economies that pursued sound macroeconomic policies, including setting up functioning financial market systems, have held up well and avoided major spillover effects. We argue that the appropriate approach to meet future refinancing needs is through the development of viable domestic and international bond markets. A key benefit of this strategy will be a reduction in systemic risk and the probability of future crisis.

Disintermediation, Bond Markets, Emerging Markets

Abstract:
This paper investigates the long-run equilibrium implications of the Expectations Hypothesis of the term structure on different maturities of high-grade yen Eurobonds and Japanese Government Bonds (JGBs) using the Canonical Cointegrating Regression (CCR) technique developed by Park [Econometrica 60 (1992) 119]. Consistent with the Expectations Hypothesis, there is some evidence of long-run equilibrium relationship between JGBs and high-grade yen Eurobonds. Furthermore, the most liquid, long-term JGBs tend to drive the yen Eurobond term structure, with short-term yields adjusting to movements in the long-term yields.

Long-run relationship, Expectations Hypothesis, Japanese yen Eurobonds, Canonical Cointegrating Regression, GARCH

Abstract:
Asset returns conforming to a Gaussian random walk are characterised by the temporal independence of the moments of the distribution. Employing currency returns, this note demonstrates the conditions that are necessary for risk to be estimated in this manner.

Scaling, Volatility, Currency returns

Abstract:
Traditional theories of credit spread behaviour predict that changes in the risk-free interest rate and asset factors are negatively correlated with changes in credit spreads on risky bonds. This study investigates this proposition in the Australian context by investigating the spread between three different rating classes and four maturities of Australian dollar Eurobonds and Australian government bonds. Using a daily data set that is divided into three subperiods between 2 January 1995 and 25 August 1998, the results confirm this empirical proposition. However, the relative weight of the explanatory variables changes with the subperiods investigated.

Credit spreads, Eurobonds, Australia

Abstract:
This contribution offers an explanation of credit derivatives as a group of financial instruments having a common purpose being the managing of credit exposures, and thus credit or default risk. This paper explores the links between their economic and financial manifestations and the legal bases for their widespread application. To ensure an understanding of the purposes served by each of the main types of credit derivatives, a detailed scrutiny of individual instruments is undertaken. Issues relating law and economics to trading in this type of derivative are investigated, then pricing issues and empirical evidence are considered. A summary brings together the range of features bearing upon the effective development of a market in these financial instruments.

Credit risk, Credit derivatives, Credit default swaps, Credit-linked notes, Credit spreads, Total return swaps