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The Determinants of Corporate Risk in Emerging Markets: An Option-Adjusted Spread Analysis

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  • Eduardo A. Cavallo
  • Patricio Valenzuela

Abstract

This study explores the determinants of corporate bond spreads in emerging market economies. Using a largely unexploited dataset, the paper finds that corporate bond spreads are determined by firm-specific variables, bond characteristics, macroeconomic conditions, sovereign risk, and global factors. A variance decomposition analysis shows that firm-level characteristics account for the larger share of the variance. In addition, the paper finds two asymmetries. The first is in line the sovereign ceiling lite hypothesis which states that the transfer of risk from the sovereign to the private sector is less than 1 to 1. The second is consistent with the popular notion that panics are common in emerging markets where investors are less informed and more prone to herding.

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Bibliographic Info

Paper provided by Inter-American Development Bank in its series IDB Publications with number 6845.

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Date of creation: Apr 2007
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Handle: RePEc:idb:brikps:6845

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Keywords: Financial Sector; WP-602;

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References

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  1. Durbin, Erik & Ng, David, 2005. "The sovereign ceiling and emerging market corporate bond spreads," Journal of International Money and Finance, Elsevier, Elsevier, vol. 24(4), pages 631-649, June.
  2. Mitchell A. Petersen, 2005. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," NBER Working Papers 11280, National Bureau of Economic Research, Inc.
  3. Campbell, John & Taksler, Glen, 2003. "Equity Volatility and Corporate Bond Yields," Scholarly Articles 3153307, Harvard University Department of Economics.
  4. Enrique G. Mendoza & Guillermo A. Calvo, 2000. "Capital-Markets Crises and Economic Collapse in Emerging Markets: An Informational-Frictions Approach," American Economic Review, American Economic Association, American Economic Association, vol. 90(2), pages 59-64, May.
  5. Barry Eichengreen & Ricardo Hausmann & Ugo Panizza, 2003. "Currency Mismatches, Debt Intolerance and Original Sin: Why They Are Not the Same and Why it Matters," NBER Working Papers 10036, National Bureau of Economic Research, Inc.
  6. Christopher F Baum & Mark E Schaffer & Steven Stillman, 2002. "IVREG2: Stata module for extended instrumental variables/2SLS and GMM estimation," Statistical Software Components S425401, Boston College Department of Economics, revised 28 Jul 2014.
  7. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, American Finance Association, vol. 29(2), pages 449-70, May.
  8. Oriana Bandiera & Gerard Caprio Jr. & Patrick Honohan & Fabio Schiantarelli, 1998. "Does Financial Reform Raise or Reduce Savings?," Boston College Working Papers in Economics, Boston College Department of Economics 413, Boston College Department of Economics.
  9. Marcel Peter & Martín Grandes, 2005. "How Important is Sovereign Risk in Determining Corporate Default Premia? the Case of South Africa," IMF Working Papers 05/217, International Monetary Fund.
  10. Eduardo Borensztein & Patricio Valenzuela & Kevin Cowan, 2007. "Sovereign Ceilings "Lite"? T+L3712he Impact of Sovereign Ratingson Corporate Ratings in Emerging Market Economies," IMF Working Papers 07/75, International Monetary Fund.
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Citations

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Cited by:
  1. Jorgensen, Ole Hagen & Apostolou, Apostolos, 2013. "Brazil's bank spread in international context : from macro to micro drivers," Policy Research Working Paper Series 6611, The World Bank.
  2. Ricardo Correa & Kuan-Hui Lee & Horacio Sapriza & Gustavo Suarez, 2012. "Sovereign credit risk, banks' government support, and bank stock returns around the world," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 1069, Board of Governors of the Federal Reserve System (U.S.).
  3. AÄŸca, Åženay & Celasun, Oya, 2012. "Sovereign debt and corporate borrowing costs in emerging markets," Journal of International Economics, Elsevier, Elsevier, vol. 88(1), pages 198-208.
  4. Uluc Aysun, 2009. "An alternative method for measuring financial frictions," Working papers, University of Connecticut, Department of Economics 2009-34, University of Connecticut, Department of Economics.
  5. Eduardo A. Cavallo & Christian Daude, 2008. "Public Investment in Developing Countries: A Blessing or a Curse?," Research Department Publications, Inter-American Development Bank, Research Department 4597, Inter-American Development Bank, Research Department.
  6. Uluc Aysun & Ryan Brady & Adam Honig, 2011. "Financial Frictions and the Credit Channel of Monetary Transmission," Working Papers, University of Central Florida, Department of Economics 2011-03, University of Central Florida, Department of Economics.
  7. Corsetti, Giancarlo & Kuester, Keith & Meier, André & Müller, Gernot J., 2014. "Sovereign risk and belief-driven fluctuations in the euro area," Journal of Monetary Economics, Elsevier, Elsevier, vol. 61(C), pages 53-73.
  8. Sanjeev Gupta & Carlos Mulas-Granados & Emanuele Baldacci, 2009. "How Effective is Fiscal Policy Response in Systemic Banking Crises?," IMF Working Papers 09/160, International Monetary Fund.
  9. Uluc Aysun & Ryan Brady & Adam Honig, 2009. "Financial Frictions and Monetary Transmission Strength: A Cross-Country Analysis," Working papers, University of Connecticut, Department of Economics 2009-24, University of Connecticut, Department of Economics, revised Jun 2010.
  10. Giancarlo Corsetti & Keith Kuester & Andre Meier & Gernot J. Muller, 2011. "Soverign risk and the effects of fiscal retrenchment in deep recessions," Working Papers 11-43, Federal Reserve Bank of Philadelphia.
  11. Klein, Christian & Stellner, Christoph, 2014. "Does sovereign risk matter? New evidence from eurozone corporate bond ratings and zero-volatility spreads," Review of Financial Economics, Elsevier, Elsevier, vol. 23(2), pages 64-74.
  12. Surach Tanboon & Suchot Piamchol & Tanawat Ruenbanterng & Paiboon Pongpaichet, 2009. "Impacts of Financial Factors on Thailand's Business Cycle Fluctuations," Working Papers 2009-01, Economic Research Department, Bank of Thailand.
  13. Eduardo Borensztein & Kevin Cowan & Patricio Valenzuela, 2013. "Sovereign Ceilings “Lite”? The Impact of Sovereign Ratings on Corporate Ratings," Documentos de Trabajo, Centro de Economía Aplicada, Universidad de Chile 299, Centro de Economía Aplicada, Universidad de Chile.
  14. Sanjeev Gupta & Amine Mati & Emanuele Baldacci, 2008. "Is it (Still) Mostly Fiscal? Determinants of Sovereign Spreads in Emerging Markets," IMF Working Papers 08/259, International Monetary Fund.
  15. Patricio Valenzuela, 2013. "Rollover risk and corporate bond spreads," Documentos de Trabajo, Centro de Economía Aplicada, Universidad de Chile 300, Centro de Economía Aplicada, Universidad de Chile.

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