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Modelling the Conditional Variance and Asymmetric Response to Past Shocks in the Malaysian Bond Market

Autor:   •  October 14, 2018  •  Thesis  •  8,398 Words (34 Pages)  •  230 Views

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1.0 Article 1:

Modelling the Conditional Variance and Asymmetric Response to past shocks in the Malaysian Bond Market

1.1 Introduction of Article 1        

The journal entitled of the “Modelling the Conditional Variance and Asymmetric Response to past shocks in the Malaysian Bond Market” that was researched and written by the three authors who are Maya Puspa Rahman, Mohd Azmi Omar and Salina Hj. Kasim that were publishes on 2015 is primarily discussed the notions on the credit spreads analysis that mainly been utilised to modelling the risk and volatility of corporate bonds. It had been executed, researched and conducted in Malaysia. Credit spreads can be appropriately defined as the difference of yield between the treasury bonds and another debt security with equal maturity but of a lesser quality. In addition to this, the credit spread also being examined by modelling the conditional variance and asymmetric response to past shocks of the long and short term investment and the non-investment grade papers.

The article is mainly discussed on the bond perspective but nevertheless it is primarily focused on the Malaysian conventional bond market. This conducted study also had been significantly relied on the findings of Rahman et al whom examined the sukuk market in Malaysia   which mainly had been based on the GARCH modelling. Not to mention, it also highlights on the movement of the risk-free rates and the direction of the future short-term rate are the most significant and relevant variables that influencing the variation and heterogeneity of in sukuk spreads for both the investment and non-investment grades of long-term sukuk.  In this context, the investment grades are referring as the quality of the company’s credit. Hence, in order for the company to be regarded as an investment grade issue, the particular company must be rated at ‘BBB’ or higher by Standard and Poor. Thus, if the company had been rated below the ‘BBB’ rating, the company is considered as non-investment grade.  

As the study also had mainly focusing on the credit spread and bond spreads, it had stated that various factors that had influence the variation in bond spreads can be analysed through the mean equation and spread volatility can be analysed through variance equation. In addition to this, bond spread here means the difference between the yields of two bonds with different credit rating. Whilst, spread volatility can be defined as fluctuation between the bid and the ask price of a security of an asset.

1.2 Summary of Article 1

The journal is specifically discussed on the credit spread analysis that had been undertaken to practice modelling the risk and volatility or corporate bonds.  The aforementioned practice is relevant in bond pricing as well as the risk management. Initially, the credit spread can be widely known as the difference of yield between the treasury bonds and another debt security with equal maturity but of a lesser quality. The articles also examine the credit spreads of the Malaysian bond market. In this context, the examining process can be done by modelling or creating the conditional variance asymmetric response to past shocks of the long and short term investment and non-investment grade papers. The terminology of short-term investment and non-investment grade paper here can be comprehended as the quality of the company’s credit. If the company wanted to achieve the recognition as an investment grade issue, the company must be rated as ‘BBB’ or higher by Standard and Poor. In addition to this, if the company rated as ‘BBB’, the company would be listed as non-investment grade.

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