Jiri Svec

Australian Bond Excess Returns: An Asset Allocation Perspective

We examine the out-of-sample predictability of excess returns in the Australian government bond market. Our results confirm previous findings that a linear combination of forward rates provides a statistically significant prediction of bond excess returns on 1- to 5-year maturity bonds. However, from an asset allocation perspective, our predictive model fails to obtain positive economic utility against the no-predictability benchmark. Our results are robust to the sample period and different parameter assumptions.

The Information Content of Ratings: An Analysis of Australian CDS Spreads

We examine the information content of Australian credit rating announcements by measuring the abnormal changes in credit default swap (CDS) spreads. CDS spreads provide a direct view of credit quality and thus should impound information quickly when investors receive new credit risk-related information via a ratings event. Using an Australian event study, we show that negative credit watches and rating upgrades contain valuable information even after controlling for sources of contamination. We find that negative credit watches elicit statistically significant market reactions: however, subsequent downgrades are anticipated. Upgrades are associated with a significant but small abnormal reduction in CDS spreads, whereas positive credit watches appear to contain no new information.

Market-Based Structural Determinants of Australian CDS Spreads

We analyse the determinants of Australian corporate credit default swap (CDS) spreads. In addition to structural determinants, consisting of equity returns, equity volatility and risk-free interest rates, we show that CDS spreads are impacted by the uncertainty of asset values as proxied by the dispersion in equity analysts’ price targets. Market-based variables including the changes in the S&P/ASX200 index return and stock-level option-implied volatility also contain valuable information about spreads. The analysis of spread determinants also shows that during the financial crisis equity-based market variables featured more prominently in the pricing of CDS spreads than credit ratings.