Date of Publication

5-25-2020

Document Type

Master's Thesis

Degree Name

Master of Science in Computational Finance

Subject Categories

Finance and Financial Management

College

Ramon V. Del Rosario College of Business

Department/Unit

Financial Management

Abstract/Summary

This study investigated the factors affecting the variation of risk premium of Philippine government bonds issued in local currency from January 2010 to September 2019. These determinants are related with the changes in global and local macroeconomic fundamentals. In addition, this study also examined the validity of the Expectations Theory (ET) which postulates the bond risk premium is constant or zero through time, making long-term rates purely based on the rational outlook of investors. Moreover, this study utilized Vector Autoregression (VAR) and Vector Error Correction Model (VECM) to determine the key drivers of Philippine local currency government bond risk premium. The results of the study confirmed previous findings that at a 5% level of significance, the past values of Philippine Gross Domestic Product (GDP), S&P 500 Index returns, and term spread significantly affect the Philippine government bond risk premium. Also, at a 10% level of significance, the past levels of Philippine inflation rate, FED fund rates, and 10-year U.S. Treasury significantly affect the Philippine government bond risk premium. On the other hand, country- specific indicators such as current account balance (as % of GDP), and global indicator such as VIX were found to be insignificant to Philippine government bond risk premium at a 5% level. Furthermore, the final model showed that past values of macroeconomic factors can explain 55.2% of the variability Philippine bond risk premium which outperformed the study of Cochrane & Piazzesi (2005) which only showed 44% of the variation of one-year excess returns of U.S. Treasury bonds. Therefore, similar to other developed and emerging countries, ET is rejected in the context of Philippine local debt market.

Abstract Format

html

Language

English

Format

Electronic

Keywords

Government securities—Philippines; Rational expectations (Economic theory)

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Embargo Period

8-10-2022

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