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The Credit Spread Dynamics of Latin American Euro Issues in International Bond Markets

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Author Info
Kannan Thuraisamy () (Deakin University)
Gerry Gannon () (Deakin University)
Jonathan A. Batten () (Hong Kong University of Science & Technology)

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Abstract

This paper investigates two important relationships in Latin American Eurobond markets: the determinants of credit spread changes using structural model and macroeconomic determinants and the underlying equilibrium dynamics when there is a default episode. We find four significant determinants of credit spread changes that drive the credit spreads: an asset and interest rate factor- consistent with structural models of credit spread pricing; the exchange rate- consistent with macroeconomic determinants; and the slope of the yield curve -consistent with business cycle effect. Also, an intra-regional analysis of sovereign yields reveals a shift in long-term equilibrium dynamics around the Argentine default on the 23rd of December 2001.

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File URL: http://www.deakin.edu.au/buslaw/aef/workingpapers/papers/2007-12aef.pdf
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Publisher Info
Paper provided by Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance in its series Accounting, Finance, Financial Planning and Insurance Series with number 2007_12.

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Length: 48 pages
Date of creation: 17 Jul 2007
Date of revision:
Handle: RePEc:dkn:acctwp:aef_2007_12

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Related research
Keywords: credit spreads; long-run dynamics; Latin America; sovereign bonds; cointegration;

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Find related papers by JEL classification:
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

References listed on IDEAS
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  3. Batten, Jonathan & Hogan, Warren & Pynnonen, Seppo, 2000. "The dynamics of Australian dollar bonds with different credit qualities," International Review of Financial Analysis, Elsevier, vol. 9(4), pages 389-404. [Downloadable!] (restricted)
  4. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June. [Downloadable!] (restricted)
  5. Longstaff, Francis A & Schwartz, Eduardo S, 1995. " A Simple Approach to Valuing Risky Fixed and Floating Rate Debt," Journal of Finance, American Finance Association, vol. 50(3), pages 789-819, July. [Downloadable!] (restricted)
  6. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May. [Downloadable!] (restricted)
    Other versions:
  7. Mills, Terence C & Mills, Alessandra G, 1991. "The International Transmission of Bond Market Movements," Bulletin of Economic Research, Blackwell Publishing, vol. 43(3), pages 273-81, July.
  8. Batten, Jonathan & Hogan, Warren, 2002. "A perspective on credit derivatives," International Review of Financial Analysis, Elsevier, vol. 11(3), pages 251-278. [Downloadable!] (restricted)
  9. Sundaresan, S.M., 2000. "Continuous-Time Methods in Finance: A Review and an Assessment," Papers 00-03, Columbia - Graduate School of Business.
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