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Common factors in emerging market spreads

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  • Patrick McGuire
  • Martijn A Schrijvers

Abstract

Emerging market sovereign bonds have become an important asset class for portfolio managers. A striking feature of the spreads on these bonds for different countries is that they tend to move in tandem over time. This paper investigates the extent to which these spreads can be explained by just one or two factors that are common across issuers. For a sample of 15 emerging market issuers, common factors account for an average of one third of the total daily variation in the various spreads. A single common factor explains approximately 80% of the common variation. This factor seems to reflect primarily changes in investors’ attitudes towards risk, as evidenced by its relatively high correlation with economic variables that track changes in risk premia.

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Bibliographic Info

Article provided by Bank for International Settlements in its journal BIS Quarterly Review.

Volume (Year): (2003)
Issue (Month): (December)
Pages:

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Handle: RePEc:bis:bisqtr:0312f

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  1. Trzcinka, Charles A, 1986. " On the Number of Factors in the Arbitrage Pricing Model," Journal of Finance, American Finance Association, vol. 41(2), pages 347-68, June.
  2. Harvey, Campbell R, 1995. "Predictable Risk and Returns in Emerging Markets," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 773-816.
  3. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
  4. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
  5. Farrell, James L, Jr, 1974. "Analyzing Covariation of Returns to Determine Homogeneous Stock Groupings," The Journal of Business, University of Chicago Press, vol. 47(2), pages 186-207, April.
  6. Mei, Jianping, 1993. " A Semiautoregression Approach to the Arbitrage Pricing Theory," Journal of Finance, American Finance Association, vol. 48(2), pages 599-620, June.
  7. Brown, Stephen J, 1989. " The Number of Factors in Security Returns," Journal of Finance, American Finance Association, vol. 44(5), pages 1247-62, December.
  8. Connor, Gregory & Korajczyk, Robert A, 1993. " A Test for the Number of Factors in an Approximate Factor Model," Journal of Finance, American Finance Association, vol. 48(4), pages 1263-91, September.
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