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Predictability in Emerging Sovereign Debt Markets

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  • Gergana Jostova

    (George Washington University)

Abstract

I find strong evidence of economically and statistically significant predictability in Brady bonds, the most liquid emerging debt market, by implementing a new model for credit spreads. Active management provides U.S. investors in emerging markets with double the buy-and-hold returns at lower risk and the equivalent of free options on Brady bonds. My analysis suggests that predictability is primarily driven by credit spread deviations from fundamentals rather than time-varying risk or risk premia. This inefficiency results from the restrictions of a nontransparent, institutionally dominated, dealer market and the lack of a fully developed derivatives market for emerging country credit risk.

Suggested Citation

  • Gergana Jostova, 2006. "Predictability in Emerging Sovereign Debt Markets," The Journal of Business, University of Chicago Press, vol. 79(2), pages 527-566, March.
    • Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:2:p:527-566
    DOI: 10.1086/499130
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    Cited by:

    1. Lizarazo, Sandra Valentina, 2013. "Default risk and risk averse international investors," Journal of International Economics, Elsevier, vol. 89(2), pages 317-330.
    2. Benoît Mercereau & Alexandra Lubomira Sowa, 2008. "Investing in emerging market local currency debt," Journal of Asset Management, Palgrave Macmillan, vol. 9(1), pages 41-48, May.
    3. Yin-Feng Gau & Wen-Ju Liao, 2012. "The predictability of excess returns in the emerging bond markets," Applied Financial Economics, Taylor & Francis Journals, vol. 22(17), pages 1429-1451, September.
    4. Andreas Rathgeber & David Rudolph & Stefan Stöckl, 2015. "Pricing anomaly at the first sight: same borrower in different currencies faces different credit spreads—an explanation by means of a quanto option," Review of Derivatives Research, Springer, vol. 18(2), pages 107-143, July.
    5. Martín Grandes, 2007. "The Determinants of Sovereign Bond Spreads: Theory and Facts From Latin America," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 44(130), pages 151-181.

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