Working Paper Series,
Stockholm School of Economics, China Economic Research Center

Abstract: This paper analyzes systematic risk of sovereign bonds in four East Asian countries: China, Malaysia, Philippines, and Thailand. A bivariate stochastic volatility model that allows for time-varying correlation is estimated with Markov Chain Monte Carlo simulation. The volatilities and correlation are then used to calculate the time-varying betas. The results show that country-specific systematic risk in Asian sovereign bonds varies over time. When adjusting for inherent exchange rate risk, the pattern of systematic risk is similar, even though the level is generally lower. The findings have important implications for international portfolio managers that invest in emerging sovereign bonds and those who need benchmark instruments to analyze risk in assets such as corporate bonds in the emerging Asian financial markets.

Keywords: Asia; sovereign bonds; systematic risk; stochastic volatility; Markov Chain Monte Carlo

JEL-codes: C32; F31; G12; G15

36 pages, December 1, 2009

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