Optimal prediction rule: an application to debt reschedulings

This paper develops and tests a new model for assessing country credit risk and is called Multivariate Cumulative Sum. This model is dynamic in nature and allows the user to predict early enough a financial distress that could lead to debt rescheduling. The findings suggest that the model is capable of detecting potential debt - repayment difficulties as early as three years in advance. This has serious financing implications, since the lender can have ample time to re-evaluate his investment opportunities towards that country and thus avoid or limit a disastrous financial exposure.

Feedback trading and the behavioural ICAPM: multivariate evidence across international equity and bond markets

In this article we develop a 'behavioural' Intertemporal Capital Asset Pricing Model (ICAPM) in which the behavioural impetus comes from the feedback trading implications for the autocorrelation of returns. We apply the model in a setting of paired equity and bond investments, employing a bivariate diagonal Berndt-Engle-Kraft-Kroner (BEKK) framework. Our empirics rely on daily equity and bond index returns across six major economies, over the period 1 January 1990 to 30 June 2005. We find evidence supporting the theory that the observed dynamics of serial correlation can be a function of both volatility and conditional covariance (between equity and bonds). Moreover, our behavioural ICAPM shows empirical promise as a useful model of asset pricing in markets that display the feedback trading phenomenon.feedback trading, autocorrelated returns, behavioural ICAPM, GARCH-M, equity and bond markets, international evidence,

Volatility-Spillover Effects in European Bond Markets

"Volatility spillover from the US and aggregate European bond markets into individual European bond markets using a GARCH volatility-spillover model is analysed. Strong statistical evidence of volatility spillover from the US and aggregate European bond markets is found. For EMU countries, the US volatility-spillover effects are rather weak (in economic terms) whereas the European volatility-spillover effects are strong. The bond markets of EMU countries have become much more integrated after the introduction of the euro, and in recent years they have become close to being perfectly integrated. The main driver of the integration appears to be convergence in interest rates." Copyright 2007 The Author Journal compilation (c) 2007 Blackwell Publishing Ltd.