Dynamic interaction and valuation of quality yen eurobonds in a multivariate EGARCH framework

Abstract

We apply a multivariate EGARCH model, developed from the closed-form valuation model of Longstaff and Sch\\.rartz ( 1995), to explain the time-varying volatility of credit spreads on AAA and AA rated yen Eurobonds with different maturities. The results support the proposition that relative credit spreads returns are negatively related to both changes in Japanese Government Bond (JGB) yields and changes in the Nikkei 225 Index. There is also evidence of a high level of volatility interaction and persistence between yen Eurobonds, though the volatility transmission mechanism is asymmetric in that negative innovations tend to increase the volatility in other bonds more than positive innovations.