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Governed by the cycle: interest rate sensitivity of emerging market corporate debt

Author

Listed:
  • Mariya Gubareva

    (Lisbon Accounting and Business School (ISCAL-IPL)
    SOCIUS/CSG (Research in Social Sciences and Management))

  • Maria Rosa Borges

    (Lisbon School of Economics and Management (ISEG-UL), Universidade de Lisboa)

Abstract

This study addresses interest rate sensitivity of emerging market corporate debt. Previous research suggests that interest rate sensitivity of corporate bonds depends on residual maturity of issues, creditworthiness of issuers, embedded options and other idiosyncratic factors. However, the dependence of interest rate sensitivity on phases of the business cycle has not received an appropriate academic attention. This paper provides empirical evidence and theoretical interpretation of a dichotomy of interest rate sensitivity across the phases of the cycle, and sheds light on how credit spreads respond to interest rates. The historical span of the research covers the period of 2004–2016. The findings imply that hedging interest rate risk ought to be a dynamic process and take into consideration where the economy is positioned in the current business cycle. This research provides important insights on the nature of interest rate sensitivity, capable of enhancing financial stability and improving efficiency of financial system.

Suggested Citation

  • Mariya Gubareva & Maria Rosa Borges, 2022. "Governed by the cycle: interest rate sensitivity of emerging market corporate debt," Annals of Operations Research, Springer, vol. 313(2), pages 991-1019, June.
    • Handle: RePEc:spr:annopr:v:313:y:2022:i:2:d:10.1007_s10479-021-03972-x
    DOI: 10.1007/s10479-021-03972-x
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    More about this item

    Keywords

    Fixed income; Downside risk management; Emerging markets; Corporate debt; Interest rate sensitivity; Capital gains;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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