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Scaling the volatility of credit spreads: evidence from Australian dollar eurobonds

Batten, Jonathan, Ellis, Craig and Hogan, Warren 2002, Scaling the volatility of credit spreads: evidence from Australian dollar eurobonds, International review of financial analysis, vol. 11, no. 3, pp. 331-344.

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Title Scaling the volatility of credit spreads: evidence from Australian dollar eurobonds
Author(s) Batten, Jonathan
Ellis, Craig
Hogan, Warren
Journal name International review of financial analysis
Volume number 11
Issue number 3
Start page 331
End page 344
Publisher Elsevier BV, North-Holland
Place of publication Amsterdam, Netherlands
Publication date 2002
ISSN 1057-5219
Keyword(s) Credit derivatives
Volatility
Dependent time series
Scaling relationships
Summary The linear rescaling of the variance of an asset's return is used by many asset pricing models when an annualised risk coefficient is required. However, this approach may not be appropriate for time series, which are not independent and identically distributed (IID). This paper investigates the scaling relationships for daily credit spreads, from January 1995 to May 1998, between AAA-, AA-, and A-rated Australian dollar denominated Eurobonds with maturities of 2, 5, 7, and 10 years. The credit spread return all display 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 risk managers and trading of credit spread instruments.
Language eng
Field of Research 150299 Banking, Finance and Investment not elsewhere classified
HERDC Research category C1 Refereed article in a scholarly journal
Copyright notice ©2002, Published by Elsevier Science Inc.
Persistent URL http://hdl.handle.net/10536/DRO/DU:30001454

Document type: Journal Article
Collection: School of Accounting, Economics and Finance
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