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

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. Copyright 2002 by Blackwell Publishers Ltd/University of Adelaide and Flinders University of South Australia