Volatility dynamics in the term structure of Latin American sovereign international bonds

We examine the nature of volatility dynamics in the term structure of sovereign bonds issued in international markets by major Latin American countries. Focusing only on the U.S. dollar-denominated sovereign international bonds, this study shows the heterogeneous nature of volatility effects that affect the term structure of individual countries in Latin America. Considering the significance of the Argentine credit event in the region, we also account for any change in dynamics following the Argentine default in 2001 by subsampling the pre- and postdefault windows. We also find some evidence of liquidity-driven volatility interaction in the term structure.

Role of index bonds in an optimal dynamic asset allocation model with real subsistence consumption

We investigate the role of index bonds in a dynamic consumption and asset allocation model where the rate of real consumption at any given time cannot fall below a fixed level. An explicit form of the optimal consumption and portfolio rule for a class of Constant Relative Risk Aversion (CRRA) utility functions is derived. Consumption increases above the subsistence level only when wealth exceeds a threshold value. Risky investments in equity and nominal bonds are initially proportional to the excess of wealth over a lower bound, and then increase nonlinearly with wealth. The desirability of investing in the risky assets are related to the agent’s risk preference, the equity premium, and the inflation risk premium. The demand for index bonds is also obtained. The results should be useful for the management of defined benefit pension funds, university endowments, and other portfolios which have a withdrawal pre-commitment in real terms.