For a individual who values his money and wants to put it, he must see the type of security he will put in, the company that issued the security, the clip of his investing and more significantly, the hazard that comes with every security traded in the market. Investment or securities with high returns can be attractive but every investor should be careful with the hazard that comes along with it. Equally much as everyone wants a high return for their investing, this would intend that investors have to presume higher hazards as good.
Having sufficient information and cognition on the type of security an investor seeks to put in and the market where the security belongs is a great advantage. Without sufficient information and cognition on the hazards incorporated with the security or investing, investors would be incurring losingss more than they should. This is the ground why factors impacting hazards in an investing and the premium investors get for presuming extra hazard, merit attending and research.
In relation to what the research workers quoted supra, this survey will concentrate on the determiners of recognition spread alterations in the Filipino authorities bond market chiefly the U.S. Dollar-denominated Republic of the Philippines bonds issued in the old ages 2005-2011. “ The recognition spread reflects the premium for default hazard over an otherwise risk-free security ” ( Batten, et al. , 2006 ) . The research workers want to find if macroeconomic variables, such as stock market index, foreign exchange rate, bond output and incline of the output curve have strong explanatory power in recognition spread alterations.
Harmonizing to a study of the Asian Development Bank, the Filipino bond market grew 12.4 % to P3.7 trillion as of end-June 2012 the positive mentality for the state fueled purchasing and issue of fixed-income instruments. Mr. Amando Tetangco, Jr. , the Governor of the Bangko Sentral ng Pilipinas, said that in 2009, issues of domestic authorities securities continue to be the primary beginning of support with a ratio of more than two-thirds of the entire adoption mix. Filipino authorities securities are chiefly made up of Treasury measures and Treasury bonds, which are besides known as Fixed-rate Treasury Notes ( FXTNs ) ( ADB, 2012 ) . There are besides Retail Treasury bonds ( RTBs ) that are intended to do authorities securities available to retail investors every bit good as create nest eggs consciousness.
The Filipino authorities does non merely publish domestic authorities securities, but besides foreign-denominated authorities securities which are the Republic of the Philippines ( ROP ) bonds. This sort of bonds that pays out semi-annual vouchers are normally USD- and EUR-denominated and are free from concluding keep backing revenue enhancement on involvement income. These USD-denominated ROPs will be the topic or high spot of this research.
Harmonizing to Investing in Bonds.com ( 2009 ) ,
“ The U.S. Treasury securities market is the largest and most liquid market in the universe. There is presently $ 7.89 trillion in outstanding marketable Treasury debt. The U.S. Treasury issues three types of securities: measures, which have a adulthood of less than 1 twelvemonth ; notes, which have a adulthood of between one and 10 old ages ; and bonds, which have a adulthood of greater than 10 old ages. ”
The US Government, peculiarly, the U.S. Department of Treasury issues U.S. Treasury Notes or Bonds ( T-Notes or T-Bonds ) which are besides known as “ U.S. Treasuries ” , U.S. Treasury Bills ( T-Bills ) , U.S. Treasury Inflation Protected Securities ( TIPS ) and in conclusion, U.S. Treasury STRIPS like U.S. Treasury Zero Coupon Bonds ( Zeros ) . U.S. Treasury Notes and Bonds possess the same features except for their tenor because T-Notes adulthoods are 2, 5 and 10 old ages while T-Bonds mature in more than 10 old ages but less than 30 old ages. Coupons for both securities are paid out semi-annually. Most of the clip, U.S. Treasuries are used as benchmark for many markets because it is believed to be free of default hazard.
The wellness of the U.S. Treasury Market is being affected by the crisis in Europe. As the crisis goes worse, the U.S. bond market will go on to underachieve. Harmonizing to Wastler ( 2012 ) , if people are sing U.S. Treasury bonds for investing, they now have to believe twice. Aside from the motion of involvement rates, the increasing size of debt of the US Government places a inquiry on their ability to pay their outstanding duties.
“ Pricing of U.S. Treasuries is similar to the rating of ROP Bonds although the former uses a different market convention in footings of day-counting every bit good as secondary market monetary value citation ” ( Wee Sit, 2012 ) . As a market convention, outputs of ROP bonds are priced and benchmarked against that of U.S. Treasuries.
Recognition spread is defined as measured by the difference between a corporate and a authorities bond output of the same adulthood ( Lepone & A ; Wong, 2009 ) , which is usually expressed in footing points. In our instance, the survey on recognition spread will affect U.S. Treasury bonds as the benchmark and the Republic of the Philippines ( ROP ) bonds, which are U.S. dollar-denominated bonds, as the hazardous plus. This difference reflects the market ‘s appraisal of default hazard which shows the comparative peril of different debt classs through the differences of the spreads among borrowers ( Boss & A ; Scheicher, 2002 ) . Credit spread motions may uncover displacements in the supply of financess provided by fiscal mediators ; such that a bead in the supply of recognition causes the cost of debt finance to increase, thereby widening recognition spreads which may later cut disbursement and production ( Gilchrist & A ; Zakrajsek, 2011 ) . Credit spreads are besides used to measure the chance of a company ‘s default, find the fiscal market ‘s general map, preserve fiscal stableness, and measure the effects of pecuniary policy steps through the interaction between corporate bonds, authorities bonds, and money markets ( Musio, 2006 ) . With this information at manus, there is a demand to analyze the determiners of recognition spread alterations.
1. 2 A Statement of the Problem
What are the determiners of recognition spread alterations in ROP bonds issued in the old ages 2005 – 2011?
1.3 Aims of the Study
The chief aim of the survey is to find the effects of the alterations in the bond output, incline of the output curve, returns on the Philippine Stock Exchange Composite Index ( PSEi ) , and foreign exchange rate on recognition spread alterations of ROP bonds for the periods 2005-2011. It aims to find whether default hazard variables have important effects on the alterations in recognition spread. Besides, this survey aims to find whether liquidness variables have important effects on the alterations in recognition spread. It intends to do investors cognizant of the factors that they have to see in mensurating the hazard and return of the security they buy so they can take advantage of the motions of the market.
1. 4 A Hypothesis
Holmium: The alterations in the 10-year U.S. exchequer bond output have no important consequence on recognition spread.
Hour angle: The alterations in the 10-year U.S. exchequer bond output have a important consequence on recognition spread.
Holmium: The alterations in the 10-year U.S. exchequer bond output less the alterations in the 2-US exchequer bond output have no important consequence on recognition spread.
Hour angle: The alterations in the 10-year U.S. exchequer bond output less the alterations in the 2-year US exchequer bond output have a important consequence on recognition spread.
Holmium: The alterations in the squared value of the 10-year U.S. exchequer bond output have no important consequence on recognition spread.
Hour angle: The alterations in the squared value of the 10-year U.S. exchequer bond output have a important consequence on recognition spread.
Holmium: The alterations in the lagged returns of the PSEi have no important consequence on recognition spread.
Hour angle: The alterations in the lagged returns of the PSEi have a important consequence on recognition spread.
Holmium: The alterations in the USD/PHP exchange rate have no important consequence on recognition spread.
Hour angle: The alterations in the USD/PHP exchange rate have a important consequence on recognition spread.
1.5 Significance of the Study
This survey will add literature to the scarce sum of surveies about recognition spreads. It will give extra research information for the usage of the academia. Research workers will hold auxiliary stuff for mention on the chase of a survey on the same topic. Foreign research workers who wish to carry on a survey of their ain state ‘s securities benchmarked against another state ‘s securities or with the U.S. as good can utilize our research as another usher and related literature on the topic, amongst the others.
Local and foreign investors will be able to see the importance of recognition spreads in the bonds that they invest to and they will be able to measure the hazards incorporated with each bond so they can mensurate and measure it based on their ain graduated table of hazard tolerance or appetency. Analyzing recognition spreads which reflects the premium for default hazard over an otherwise risk-free security will besides inform investors of the extra return they get in exchange of presuming extra hazard. It will assist them measure the issuer of the security whether they give satisfactory and justified returns to their investors.
The Filipino authorities will measure the effects of different factors to the recognition spread of ROP bonds benchmarked against U.S. Treasuries so they can perchance modulate them more and decrease the recognition spread in the bonds they issue. They can set the recognition spreads through the factors that significantly affect it, doing them pay less premium to their creditors.
1. 6 Scope and Restrictions
The survey will concentrate on the determiners of recognition spread alterations of U.S. Dollar- denominated ROP Bonds for the old ages 2005-2011. The variables that will be used in the survey are the alterations in the bond output, alterations in the squared value of the bond output and alterations in the incline of the output curve which are the variables that capture default hazard. Besides included are alterations in the lagged of PSEi returns and alterations in the exchange rate as market variables.
Restrictions of the survey, on the other manus, are the research workers ‘ deficiency of direct entree to Bloomberg or any database that provides the informations necessary to carry on the survey. Another restriction for this survey is the absence of a developed options and hereafters market in the Philippines. Due to this restriction, variables sing derived functions are removed from the informations.
Review of Related Literature
This chapter shall show the variables used through the treatment of different diaries of past surveies related to the chief subject of this research. The chapter will besides show the spread between the surveies done in the yesteryear and the survey to be done by the research workers.
2.1. Description of Each Variable Used
2.1.1. Credit Spread
Credit spread, as defined by Lepone and Wong ( 2009 ) is the difference of two bond outputs, corporate and authorities, with the same tenor. In their survey, they found out that the motions of the recognition spread in past observations go on before any noteworthy motions in the stock markets and the economic system occurs. This is supported by Gilchrist and Zakrajsek in their survey done in 2010. They defined recognition spread as the difference of the outputs of diverse debt instruments of private entities and the securities issued by the authorities. A It is a critical step for the default hazard and other kinds of fiscal jobs in the fiscal system. Credit spread is an effectual instrument to anticipate future growing in the economic system throughout different economic indexs ( Gilchrist and Zakrajsek, 2010 ) .
Credit spread alterations besides suggest motions in the sum of loaning provided by fiscal establishments. This, in bend, adds more accent on the importance of recognition spread alterations in calculating economic motions in the hereafter. One of the surveies done show that a lessening in the balance sheet of fiscal establishments and other fiscal mediators create a lower supply of loans. On the other manus, a lessening in the balance sheet would take to an addition in recognition spread. With this, the impact of an addition in recognition spread motion demo a possible lessening in the degree of disbursement and production, therefore, a weaker economic system ( Gilchrist and Zakrajsek, 2010 ) .A A A
2.1.2. Changes in the 10-year Government Bond Yield
Harmonizing to the survey of Lepone and Wong ( 2009 ) , the 10-year authorities bond output is used as a placeholder for the topographic point rate. The topographic point rate is an of import variable in the structural theoretical accounts of default proposed by Black and Scholes ( 1973 ) and Merton ( 1974 ) . The consequence of their survey states that alterations in the topographic point rate has a negative relationship to recognition spreads and that it is an of import variable in finding recognition spreads which is besides true in the survey of Yap and Gannon ( 2007 ) . Longstaff and Schwartz ( 1992 ) argue that spreads and the riskless rate should exhibit a negative relationship because an addition in the riskless rate of the bond besides increases that risk-neutral impetus of the procedure that describes house value and therefore reduces the chance of default.
Molano ( 2003 ) , looked at the recognition spreads of emerging markets and found that they are sensitive to the pecuniary of U.S. It is believed that U.S. exchequer outputs are extremely correlated with the outputs of emerging markets when involvement rates are increasing. Trap and Gannon ( 2007 ) illustrated in their survey that Malayan bonds have changing grades of cointegration with U.S. riskless rate of longer to adulthood.
The alterations in the squared value of the 10-year authorities bond is included in the survey of Lepone and Wong ( 2009 ) , to capture the non-linear effects of the term construction. The term construction of involvement rates is the relationship between the outputs of the securities and their clip to adulthood. The term construction can be taken in a signifier of a graph called the output curve. This output curve usually has an increasing incline and curves as the clip to adulthood additions. This curvature is the 1 that should be taken into history. This variable is statistically important ; nevertheless, in the survey of Batten, Fetherson, and Hoontrakul ( 2006 ) , the emerged coefficient is little and by and large non economically important.
2.1.3. Changes in the Slope of the Yield Curve
Lepone and Wong ( 2009 ) , in their survey, considered the incline of the output curve as an of import determiner of recognition spreads. They defined the incline as the difference between the output of the 10 twelvemonth authorities bond output and the three twelvemonth authorities bond output. By deducting these two bond outputs, the variable gives a wide position of the state ‘s economic conditions ( Lepone and Wong, 2009 ) .
A negative relationship is expected to from the alterations in the incline of the output curve to the alterations in recognition spreads. As stated in the research done by Miloudi and Moraux ( 2009 ) , the incline of the output curve may be interpreted as the signal of the awaited degree of the hereafter short rates. The output curve may besides be the indicant of how good or how bad the economic system is executing. A positive alteration in the incline of the output curve would intend a negative alteration on the recognition spread and a negative alteration in the incline of the output curve would intend an addition in the recognition spread ( Miloudi and Moraux ( 2009 ) .
Avramov, Jostova, and Philipov ( 2007 ) besides said that the addition of the incline decreases the recognition spreads because the positive alteration in the incline of the output curve would intend an addition in the topographic point rates. Besides, an addition in the incline would intend that the economic system is bettering. In contrast to this, they besides said that an addition in the alterations in the incline would intend an addition in future involvement rates, take downing the rating of a company, therefore increasing the recognition spreads ( Avramov, Jostova, and Philipov, 2007 ) .
2.1.4. Changes in the Lagged Returns on the PSEi
2.1.5. Changes in the USD/PHP Exchange Rate
Trap and Gannon ( 2007 ) considers foreign exchange variables as an of import factor as steep currency grasps in which the debt is denominated ( most of the clip in US dollar ) , may straight impact a state ‘s liability instantly. Depreciation of the domestic currency may besides do a slack in the export grosss of the state which may farther decrease its ability to serve its debt. In the investing determination of foreign currency bonds, the most of import factor to be considered is the foreign exchange hazard since an grasp of the place currency may cut down the forecasted net income. The survey used the day-to-day rate of return of the Nipponese Yen and the British Pound as placeholders of the foreign exchange rate given their strong trade relationship with Malaysia. The consequence of the survey has shown that alterations in Nipponese Hankerings were more influential than the alterations in British Pound for the instance of US dollar-denominated Malayan bonds.
In the survey of Batten et Al. ( 2006 ) , the exchange rate variable was important merely for spreads on Philippine bonds since the bonds issued by the state were non of the same recognition category as other Asiatic issues. The variable placeholders macroeconomic uncertainness therefore a depreciation of the local currency ( grasp of the US dollar ) is expected to be associated with an addition in recognition spreads. It was found that the exchange rate is negatively related to the alterations in the local stock market index and positively related to alterations in the recognition spread. This implies that an addition in the exchange rate or a depreciation of the peso is associated with an addition in the recognition spread and a diminution in the stock index.A A A A A A A
2.4. Literature Map
As shown in the literature map, our survey will concentrate on the Bond market, both the American and the Filipino Chemical bond Market. We will be analyzing the determiners of Credit Spread Changes in the Filipino scene. Alternatively of acquiring the difference in the output of a corporate bond and a authorities bond, we will utilize authorities bond from the United States and a authorities bond with the same tenor from the Filipino bond market.
For the survey, the dependant variable would be the Changes in the Credit Spread and the independent variables will be the alterations in the 10-year US Government bond output, alterations in the incline of the output curve, alterations in the squared value of the 10-year US Government bond output, alterations in the lagged returns of the PSEi, and the alterations in the USD/PHP exchange rate. All of these independent variable were used in past surveies and with this, the same variables shall be applied in the Filipino scene.
2.3. Research Gap
One of the primary spread found by the research workers is that there are no, if non a few, surveies bing on recognition spreads in the Filipino bond market. Surveies found are set in other bond markets from other states. And so for this survey, the determiners on recognition spread to be analyzed will be from the Filipino bond market.
The diary articles on the survey of recognition spreads used the corporate bonds ‘ recognition spread as a variable for their survey. Unfortunately in the Philippine scene, there is a scarce beginning of informations on corporate bonds. Knowing this information, the research workers shall alternatively utilize the recognition spread of the authorities bonds, specifically USD Denominated ROP Bonds, for the survey.
Previous surveies on the determiners of recognition spread alterations used informations in a hebdomadal footing. For this research, day-to-day informations footing shall be applied for the variables alternatively of the hebdomadal footing in order to avoid the jobs in stationarity when arrested development is applied to the survey.
This chapter will discourse the theory applicable to the survey, the constructs included in the survey, and the theoretical account the research workers will utilize in measuring the effects of the independent variables to the dependant variable. This chapter will besides analyze the possible relationship of the independent variables to the dependant variable.
3.1 Theoretical Model
3.1.1 Hazard and Return
The chief theory that will be discussed in the survey is the hazard and return theory. This states that the higher the hazard of an investing, the higher the return the investors should have. Credit spread is the difference between a corporate and a authorities bond output of the same adulthood ( Lepone & A ; Wong, 2009 ) . This spread measures the recognition hazard and chance of default of the corporate bond. The higher the recognition spread between the bonds and the benchmark authorities bonds, the higher the hazard of the bond to default, therefore, a higher return should be given to the investor.
3.2 Conceptual Model
3.2.1. Credit Spread
Recognition spread is the output spread or difference in output between different securities which stems from the different recognition quality of securities ( Wrobel, n.d. ) . The recognition spread of a security is frequently quoted in relation to a output of a riskless benchmark security. One factor that affects the recognition spread is the chance of default of the security ; the higher the spread of the security, the higher the default hazard. Other factors impacting recognition spreads are the costs related to the usage of recognition merchandises, the accommodation for the bond ‘s life-time, the liquidness of the security, and the downgrade hazard.
Recognition spread can be an index of the economic system. When a recognition spread is broad between the hazardous security and the riskless security, this implies that the market is adding more default hazard which indicates a slow-down in the economic system. On the other manus, when the recognition spread is narrow between the hazardous security and the riskless security, there will be less default hazard on the hazardous security, hence, take downing its recognition spread which implies that the economic system is turning.
3.2.2 Bond Output
The bond output is the rate of return the investor gets in keeping the bond. There are different types of bond output which are the voucher rate, the current output, the output to adulthood, and the output to name. The voucher rate is the rate the issuer of the security will necessitate to pay involvement payments sporadically. The current output is the rate of return the investors will anticipate in keeping the security in a twelvemonth. The output to adulthood is the entire return that the investors will acquire in keeping the bond until adulthood day of the month. Last, the output to name, merely applicable in a callable bond, is the involvement rate the bond holder gets in keeping the security until the call day of the month.
The type of output that will be used in the survey is the output to adulthood. The output to adulthood is the price reduction rate that equates the value of the bond with the present value of the watercourse of hard currency flows ( involvement and principal ) ( Reilly and Brown, 2009 ) . As the monetary value of the bond additions, the output to adulthood lessenings and when the monetary value of the bond lessenings, the output to adulthood additions. This addition and lessening in the monetary values of the bond is due to the hazard of the bond. When the monetary value of the bond is below par value, there is more hazard and is sold at a price reduction. When the monetary value of the bond is above par value, there is less hazard and the bond is sold at a premium.
3.2.3 Yield CurveA A A
Output curve is the representation of the term construction of involvement rates. This shows the relationship between the output of the security and the clip of adulthood of the security. It is composed of Treasury measures, Treasury notes, and Treasury bonds. There are certain forms of the output curve which are: positive ( normal output curve ) , level, negative ( opposite ) , and humped.
The output curve can be utile in calculating involvement rates, observing overpriced and underpriced securities, and for fiscal mediators. An upward-sloping output curve can let investors to look for chances to travel off from long-run securities into investings whose market monetary value is less sensitive to involvement alterations ( Rose, 2008 ) . On the other manus, a declivitous output curve notifies the likeliness that there will be diminution in the involvement rates therefore ; increasing the monetary values of the bonds if the market ‘s anticipation of lower involvement rates becomes true. The output curve can besides observe overpriced and underpriced securities. If a security ‘s output lies above the output curve, this means that the security is temporarily underpriced in relation to other securities with the same adulthood. On the other manus, a security ‘s output prevarication below the output curve means that the security is temporarily overpriced in relation to other securities with the same adulthood. Last, a output curve is of import for fiscal mediators since they use it for gaining. The steeper the upward incline of the output curve, the wider the spread between borrowing and imparting rates and the higher the net income for the fiscal mediator. A A A A A A
3.2.4 Philippine Stock Exchange Composite Index
The Philippine Stock Exchange Composite Index ( PSEi ) , once called Phisix, is the chief stock market index in the Philippines. This is composed of a fixed basket of 30 common stocks of listed companies, carefully selected to stand for the general motion of the stock market ( PSEacademy decision maker, 2011 ) . This is the benchmark in mensurating the stock market public presentation in the state.
3.2.5 Foreign Exchange Rate
The foreign exchange rate is the rate by which a currency is pegged in another state ‘s currency. Exchange rates alterations in response to the supply and demand conditions. If authorities bureaus, corporations, and persons all of a sudden shifted their aggregative demand on a certain currency, or shifted their aggregative supply of that currency, the monetary value will alter ( Madura, 2008 ) . An aggregative demand on a currency will appreciate its value while an aggregative supply of a currency will deprecate the value.
The hazard associated with foreign exchange rate is the foreign exchange hazard. This type of hazard is due to the variable exchange rates between two currencies. Foreign exchange hazard is the exposure of possible losingss due to the devaluation of the local currency against the foreign currency. Normally, the 1s that are largely affected by this hazard are the investors, exporters and importers, and business communities. To pull off this hazard, people can merchandise local currencies to forestall holding an exposure to foreign exchange hazard. They can besides utilize fudging techniques, like forward contracts, to cover with the hazard.
3.3 Operational Model
a?†CSt = I?0 + I?1a?†USt + I?2a?† ( USt ) 2 + I?3a?†Slopet + I?4a?†PSEi + I?5a?†USDPHP + Iµ
a?†CSt = alterations in recognition spread
a?†USt = alterations in the 10-year U.S. authorities bond output
a?† ( USt ) 2 = alterations in the squared value of 10-year U.S. authorities bond output
a?†Slopet = alterations in the output of 10-year U.S. authorities bond less the output of 2 twelvemonth U.S. authorities bond
a?†PSEi = alterations in the lagged returns on the PSEi
a?†USDPHP = alterations in the USD/PHP exchange rate
In measuring the theoretical account, the research workers will foremost utilize the Pearson Product Momentum Correlation Coefficient in finding the relationship of the independent variables to the dependant variable.
To supply more grounds on the relationship of the independent variables to the dependent variables, the research workers will utilize the Autoregressive and Moving Average ( ARMA ) Model for the arrested development to extinguish possible autocorrelation in the remainders. Before utilizing the technique, Augmented Dickey-Fuller trial will be used to analyze if the information is stationary or non. The research workers will besides utilize the Generalized Autoregressive Conditional Heteroscedasticity ( GARCH ) Model for hardiness checking to extinguish volatility constellating in the time-series informations.
3.3.2 A-Priori Expectations
Table 1 – A-priori Expectations of the Independent Variables to Credit Spread
Changes in the 10-year authorities bond output
The variable is negatively- related to recognition spread because when the riskless bond output additions, the difference between the rate of the hazardous security and riskless security narrows therefore, take downing the chance of default.
Changes in the incline of the output curve
This variable is negatively-related to recognition spread because when the difference between the 10-year and the 2-year output additions, this should increase the future short rates doing a lessening in the recognition spread.
Changes in the lagged returns on the PSEi
This variable is negatively-related to recognition spread because when the returns on the PSE Composite Index are positive, this means that the economic system is good, therefore, recognition spreads should be low.
Changes in the foreign exchange rate
This variable is positively-related to recognition spread because depreciation in the place currency will intend that the place state ( local currency ) will hold to pay more of the foreign state ‘s currency therefore, increasing the recognition spread.
3.3.3 Operational Definitions
Augmented Dickey Fuller Test
– a statistical trial that determines if the information is stationary or non
Pearson Product Momentum Correlation Coefficient
– Angstrom technique that measures the correlativity of linearly-related variables
Autoregressive and Moving Average Model
– It notifies that the dependant variable is besides reliant on its value in the old clip period and the value of the white noise mistake term in the old clip period.
Generalized Autoregressive Conditional Heteroscedasticity Model
– The conditional discrepancy of the error term depends non merely on the squared mistake term in the old clip period but besides on its conditional discrepancy in the old clip period ( Gujarati, 2003 ) .
– The difference between the output of a hazardous security and a riskless rate security with the same adulthoods
Government Bond Yield
– This is the output to adulthood of the authorities bond
Slope of the Yield Curve
– The difference between the 10-year authorities bond output and a 2-year authorities bond output.
Philippine Stock Exchange Index
– The chief stock market index in the Philippines that measures the public presentation of the stock market.
USD/PHP Exchange Rate
– The rate in which the USD ( Dollar ) can be converted into PHP ( Peso ) .
This chapter illustrates the research design and trying design used in the survey, the informations description and informations aggregation of the survey. This chapter will besides discourse the method of informations analysis used by the research workers every bit good as the methodological restrictions evident in the survey.
4.1 Research Design
Correlational research and appraising research are the research designs that the research workers will be utilizing in the survey. A correlational research will be conducted to find whether the independent variables have a important consequence on the dependant variable which is the recognition spread alterations. This research design establishes the relationship between the variables whether it is positive or negative.
An appraising research will besides be adopted to measure the public presentation result or impact of the independent variables to the recognition spread while sing an equal clip span from 2005 to 2011, to place the effects accurately.
4.2 Sampling Design
The survey covers ROP bonds, which are U.S. dollar-denominated bonds, issued from the old ages 2005 to 2011. Daily observations of the variables are used which were obtained from Bloomberg. A ROP bonds pay out semi-annual vouchers and have a 30/360 day-count convention. Eleven bonds were issued within the sample period, all of which are incorporated into the survey. The recognition spread is estimated by the difference between these 11 ROP bonds and U.S. benchmark exchequer bonds of the same adulthoods.
4.3 Data Description and Data Collection
The survey will utilize day-to-day observations of the variables covering the periods 2005-2011. Datas for the recognition spread, bond output, incline of the output curve and returns on the PSE composite indexA were all obtained from Bloomberg. For the foreign exchange rate, the figures were sourced from OANDA.
The dependant variable is the recognition spread alterations which is measured as the difference between the alterations in the outputs of the ROP bonds and U.S. Treasury bonds holding the same adulthoods. On the other manus, the independent variables are the bond output, incline of the output curve, lagged returns on the PSE Composite index and the foreign exchange rate. Inventions to involvement rate factors, peculiarly alterations in the bond output and incline of the output curve, are considered as the most of import determiners of alterations in the recognition spread. The topographic point rate is proxied by the alterations on the 10-year U.S. exchequer bond output while the alterations in the incline of the output curve is calculated as the difference between the alterations in the output of the 10-year and 2-year U.S. Treasury bond. The squared values of the bond output are besides included in the theoretical account to take into history the nonlinear effects due to the curvature of the outputs of the U.S exchequer bonds. Changes in the lagged returns on the PSE Composite Index are incorporated in the theoretical account to find the consequence of the stock returns to the recognition spread. This variable serves as placeholder for the expected hereafter additions of the economic system. Last, historical Dollar against Peso ( USD/PHP ) exchange rates taken from OANDA are used for the foreign exchange rate variable as placeholder for macroeconomic uncertainness. A In the survey of Batten et Al. ( 2006 ) , the exchange rate variable was found to hold important effects to the spreads on Philippine bonds whereas, Yap and Gannon ( 2007 ) considered foreign exchange hazard an of import factor in the investing determination of foreign currency bonds.
4.4 Data Analysis
For the survey, the research workers will carry on a correlativity trial utilizing Pearson ‘s Product Momentum Correlation Coefficient to find the relationship of the independent variables to the recognition spread. It is normally referred as Pearson ‘s R which is used for informations measured on an interval or ratio graduated table ( Jackson, 2011 ) . The mark of the Pearson indicates the way of the relationship either positive or negative, whereas the value indicates its strength ( Lomax, 2007 ) . A
Trials for stationarity would besides be necessary since a non-stationary series would take to specious consequences from econometric trials. For the stationarity trial, the research workers will utilize the Augmented Dickey Fuller ( ADF ) trial, a statistical trial which takes into history the possible correlativity in the mistake footings to find if a series is stationary. In instance that consequences indicate non-stationarity, the integrating procedure will be applied wherein the series is differenced 500 times to accomplish stationarity.
A time-series arrested development, specifically the Autoregressive and Moving Average ( ARMA ) Model, shall be applied in look intoing the effects of the explanatory variables to recognition spread alterations. The ARMA theoretical account is a combination of the Autoregressive and Moving Average strategy which informs that the dependant variable relies on its ain old values and a combination of the current and old values of a white noise mistake term, which is a random mistake term holding zero mean, changeless discrepancy, and no autocorrelation. The Generalized Autoregressive Conditional Heteroscedasticity ( GARCH ) theoretical account was besides applied for a more efficient re-estimation of the equation and hardiness checking. In the GARCH theoretical account, the conditional discrepancy of the mistake term non merely relies on the squared mistake term in the old clip period but besides on its conditional discrepancy in the old clip period ( Gujarati, 2003 ) . The GARCH procedure exhibits heavy dress suits therefore it can pattern both the conditional heteroscedasticity and heavy tailed distributions of fiscal market informations ( Ruppert, 2010 ) .
Probes of the survey of Yap and Gannon ( 2007 ) on the recognition spreads and remainders from the equation reveal that some of the series exhibits autocorrelation which means that the spreads of the series are continuously influenced by past spreads. By utilizing the ARMA theoretical account, the autocorrelation shall be eliminated in the arrested development. Consequently, the equation is extended with the inclusion of Autoregressive footings ( AR ) and Traveling Average footings to stipulate the dependant variable, which is the recognition spread alterations, as a map of its past values.
In the event that the series shows grounds of possessing residuary consecutive correlativity, GARCH specifications should be applied since the theoretical accounts are still mildly misspecified. In consequence, consequences would be sharpened every bit good as the significance of the variables tested in the average arrested developments. Residual parametric quantities and standard mistakes in the re-estimated equation are besides expected to go more efficient, exhibiting a normal distribution without consecutive correlativities.
4.5 Methodological Restrictions
Linear structural time-series theoretical accounts are unable to explicate certain characteristics common to fiscal information. Given that the conditional discrepancy of the ARMA theoretical account is changeless, it can non capture the volatility of the time-series informations. Fiscal plus returns besides tend to hold heavy tail distributions which means that there is a larger chance of geting really big values. As the survey uses daily informations, volatility bunch in fiscal returns is apparent because the continuity of conditional volatility tends to increase with the sample ( Alexander, 2002 ) but, an ARMA additive arrested development does non suit volatility bunch. For all these grounds, another time-series theoretical account is considered, which is the GARCH theoretical account, since it has indiscriminately changing volatility, exhibits heavy dress suits and eliminates volatility bunch ( Ruppert, 2010 ) .