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Working Paper 331 - Mispricing of Sovereign Risk and Investor Herding in African Debt Markets

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Abstract

In light of the limited evidence on herd behavior in frontier debt markets, this paper examines whether African sovereign risk is mispriced due to international investor herding and the tendency to cluster as one asset class rather than being driven by macroeconomic fundamentals. Exploiting high-frequency financial datasets of 55 countries between 2004 to 2019, we estimate several regression specifications and apply the Blinder-Oaxaca decomposition approach to reflect the determinants of sovereign risk pricing in Africa compared to other world regions. The results confirm an asymmetric and herd behavior in African debt markets and demonstrate that African debt assets are treated as one category or class. Our results also indicate that the mispricing of Africa's sovereign risk is mainly due to discriminatory behavior by international investors rather than to differences in the quality of macroeconomic fundamentals between Africa and non-Africa regions.

Suggested Citation

  • Hanan Morsy & Eman Moustafa, 2020. "Working Paper 331 - Mispricing of Sovereign Risk and Investor Herding in African Debt Markets," Working Paper Series 2457, African Development Bank.
    • Handle: RePEc:adb:adbwps:2457
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    More about this item

    Keywords

    Herding; contagion; mispricing; CDS spreads; bond yields; sovereign risk; sovereign debt; Africa JEL Classification: G12; G14; G15; F34;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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