Scaling the Volatility of Credit Spreads: Evidence from Australian Dollar Eurobonds

Nanyang Technological University, Department of Banking and Finance Working Paper No. 99-03

36 Pages Posted: 13 Dec 1999

See all articles by Jonathan A. Batten

Jonathan A. Batten

RMIT University

Craig Ellis

Education Centre Australia

Warren P. Hogan

University of Technology, Sydney - School of Finance and Economics

Date Written: April 1999

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.

JEL Classification: C1, F3, G1

Suggested Citation

Batten, Jonathan A. and Ellis, Craig and Hogan, Warren P., Scaling the Volatility of Credit Spreads: Evidence from Australian Dollar Eurobonds (April 1999). Nanyang Technological University, Department of Banking and Finance Working Paper No. 99-03, Available at SSRN: https://ssrn.com/abstract=159648 or http://dx.doi.org/10.2139/ssrn.159648

Jonathan A. Batten (Contact Author)

RMIT University ( email )

Level 12, 239 Bourke Street
Melbourne, Victoria
Australia

HOME PAGE: http://https://www.rmit.edu.au/contact/staff-contacts/academic-staff/b/batten-professor-jonathan

Craig Ellis

Education Centre Australia ( email )

Sydney
Australia

Warren P. Hogan

University of Technology, Sydney - School of Finance and Economics ( email )

Haymarket
Sydney, NSW 2007
Australia
+61 2 9514 7730 (Phone)
+61 2 9514 7711 (Fax)

HOME PAGE: http://datasearch.uts.edu.au/business/finance/staff/StaffDetails.cfm?UnitStaffId=91

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