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The evolution and determinants of emerging market credit spreads in the 1990s

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  • Steven B. Kamin
  • Karsten von Kleist
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    Abstract

    This paper develops measures of emerging market credit spreads for the 1990s, based on data on new bond issues and bank loans, that cover a broader range of borrowers than the Brady bond spreads most commonly used to date. These measures are used to identify the impacts of credit ratings, maturity and currency denomination on spreads. We find important regional differences in spreads across the developing world, even after controlling for risk and maturity. We also identify the evolution of spreads during the 1990s up until the advent of the Asian financial crisis, holding other determinants constant, and find that emerging market spreads declined by more than can be explained by improvements in risk. However, for emerging market instruments with relatively favourable credit ratings, trends in spreads differed considerably from those experienced by Brady bonds. Finally, and in contrast to much market commentary, we find that variations in industrial country short-term interest rates explain relatively little of the decline in emerging market bond spreads. Longer-term trends, perhaps reflecting globalisation, along with the temporary impact of the Mexican financial crisis, may have been more important factors in the behaviour of emerging market spreads.

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    File URL: http://www.federalreserve.gov/pubs/ifdp/1999/653/default.htm
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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 653.

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    Date of creation: 1999
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    Handle: RePEc:fip:fedgif:653

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    Keywords: Credit ratings ; Developing countries ; Bonds;

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    References

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    1. Richard Cantor & Frank Packer, 1996. "Determinants and impacts of sovereign credit ratings," Research Paper 9608, Federal Reserve Bank of New York.
    2. Sebastian Edwards, 1986. "The Pricing of Bonds and Bank Loans in International Markets: An Empirical Analysis of Developing Countries' Foreign Borrowing," NBER Working Papers 1689, National Bureau of Economic Research, Inc.
    3. Gregory R. Duffee, 1995. "The variation of default risk with Treasury yields," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 29-58.
    4. John Clark, 1994. "The structure, growth, and recent performance of the Latin American bond market," Research Paper 9416, Federal Reserve Bank of New York.
    5. Leonardo Leiderman & Carmen Reinhart & Guillermo Calvo, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Working Papers 92/62, International Monetary Fund.
    6. Demirguc-Kunt, Asli & Detragiache, Enrica, 1992. "Interest rates, official lending, and the debt crisis : a reassessment," Policy Research Working Paper Series 932, The World Bank.
    7. Hong G. Min, 1998. "Determinants of emerging market bond spread : do economic fundamentals matter?," Policy Research Working Paper Series 1899, The World Bank.
    8. Guillermo Larraín & Helmut Reisen & Julia von Maltzan, 1997. "Emerging Market Risk and Sovereign Credit Ratings," OECD Development Centre Working Papers 124, OECD Publishing.
    9. Shogo Ishii & David Andrew, 1995. "The Mexican Financial Crisis - A Test of the Resilience of the Markets for Developing Country Securities," IMF Working Papers 95/132, International Monetary Fund.
    10. Feder, Gershon & Ross, Knud Z, 1982. " Risk Assessments and Risk Premiums in the Eurodollar Market," Journal of Finance, American Finance Association, vol. 37(3), pages 679-91, June.
    11. Barry Eichengreen & Ashoka Mody, 1998. "What Explains Changing Spreads on Emerging-Market Debt: Fundamentals or Market Sentiment?," NBER Working Papers 6408, National Bureau of Economic Research, Inc.
    12. Eichengreen, Barry & Mody, Ashoka, 1998. "Interest Rates in the North and Capital Flows to the South: Is There a Missing Link?," International Finance, Wiley Blackwell, vol. 1(1), pages 35-57, October.
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