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A model of asset pricing under country risk

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  • Andrade, Sandro C.
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    Abstract

    I develop a formal model that could provide quantitative guidance to practitioners who use sovereign yield spreads in emerging market asset valuation. The model provides analytical formulas relating emerging market stock P/E ratios (and expected returns) to the corresponding average yield spread in sovereign bonds. In the model, sovereign yield spreads carry information about the likelihood of a negative regime change in an emerging market ("country risk"), under the common assumption that the regime change is associated with a hostile renegotiation of the country's foreign debt. In the model, country risk is priced because the regime change may be endogenously associated with bad states of the global economy. Data from emerging markets are consistent with some of the model's quantitative and qualitative predictions.

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    Bibliographic Info

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

    Volume (Year): 28 (2009)
    Issue (Month): 4 (June)
    Pages: 671-695

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    Handle: RePEc:eee:jimfin:v:28:y:2009:i:4:p:671-695

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

    Related research

    Keywords: Sovereign spread Asset pricing Emerging market discount;

    References

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    Cited by:
    1. Andrade, Sandro C. & Kohlscheen, Emanuel, 2010. "Pessimistic Foreign Investors and Turmoil in Emerging Markets : The Case of Brazil in 2002," The Warwick Economics Research Paper Series (TWERPS) 926, University of Warwick, Department of Economics.
    2. Jens Hilscher & Yves Nosbusch, 2010. "Determinants of Sovereign Risk: Macroeconomic Fundamentals and the Pricing of Sovereign Debt," Review of Finance, European Finance Association, vol. 14(2), pages 235-262.
    3. Adrien Verdelhan & Nicola Borri, 2010. "Sovereign Risk Premia," 2010 Meeting Papers 1122, Society for Economic Dynamics.
    4. Marcelo Bianconi & Joe A. Yoshino & Mariana O. Machado de Sousa, 2011. "BRIC and the U.S. Financial Crisis: An Empirical Investigation of Stocks and Bonds Markets," Discussion Papers Series, Department of Economics, Tufts University 0764, Department of Economics, Tufts University.

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