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The sovereign ceiling and emerging market corporate bond spreads

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  • Durbin, Erik
  • Ng, David
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Abstract

We use the spreads of emerging market bonds traded in secondary markets to study investors’ perception of country risk. Speci...cally, we ask whether investors apply the “sovereign ceiling,” which says that no ...rm is more creditworthy than its government. To do this we compare the spreads of bonds issued by ...rms to those of bonds issued by the ...rms’ home governments. We ...nd several cases where a ...rm’s bond trades at a lower spread than that of the ...rm’s government, indicating that investors do not always apply the sovereign ceiling. Bonds for which this is true tend to have substantial export earnings and/or a close relationship with either a foreign ...rm or with the home government. For countries with lower perceived default risk, we ...nd that investors do not believe that whenever the government defaults, the ...rm will default.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 24 (2005)
Issue (Month): 4 (June)
Pages: 631-649

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Handle: RePEc:eee:jimfin:v:24:y:2005:i:4:p:631-649

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Web page: http://www.elsevier.com/locate/inca/30443

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  1. Frederic S. Mishkin, 1996. "Understanding Financial Crises: A Developing Country Perspective," NBER Working Papers 5600, National Bureau of Economic Research, Inc.
  2. Barry Eichengreen & Ashoka Mody, 1998. "What Explains Changing Spreads on Emerging-Market Debt: Fundamentals or Market Sentiment?," NBER Working Papers 6408, National Bureau of Economic Research, Inc.
  3. Domowitz, Ian & Glen, Jack & Madhavan, Ananth, 1998. "Country and Currency Risk Premia in an Emerging Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(02), pages 189-216, June.
  4. Donald R. Lessard, 1996. "Incorporating Country Risk In The Valuation Of Offshore Projects," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(3), pages 52-63.
  5. Edwin J. Elton, 2001. "Explaining the Rate Spread on Corporate Bonds," Journal of Finance, American Finance Association, vol. 56(1), pages 247-277, 02.
  6. Tom Keck & Eric Levengood & AL Longfield, 1998. "Using Discounted Cash Flow Analysis In An International Setting: A Survey Of Issues In Modeling The Cost Of Capital," Journal of Applied Corporate Finance, Morgan Stanley, vol. 11(3), pages 82-99.
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