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How Important is Sovereign Risk in Determining Corporate Default Premia? the Case of South Africa

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Author Info

  • Marcel Peter
  • Martín Grandes

Abstract

The paper analyzes and quantifies the importance of sovereign risk in determining corporate default premia (yield spreads). It also investigates the extent to which the practice by rating agencies and banks of not rating companies higher than their sovereign ("country or sovereign ceiling") is reflected in the yields of South African local-currency-denominated corporate bonds. The main findings are: (i) sovereign risk appears to be the single most important determinant of corporate default premia in South Africa; (ii) the sovereign ceiling (in local-currency terms) does not apply in the spreads of the industrial multinational companies in the sample; and (iii) consistent with rating agency policy, however, the sovereign ceiling appears to apply in the spreads of most financial companies in the sample.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/217.

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Length: 64
Date of creation: 01 Nov 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/217

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Keywords: Economic models; Risk premium; bond; bonds; equation; probability; corporate bond; correlation; corporate bonds; autocorrelation; statistic; probabilities; domestic-currency; risk-free interest rate; coupon bonds; bond yields; bond market; government bonds; interest rate risk; bond markets; difference equation; bond spreads; sovereign bond; zero-coupon bonds; equations; bond yield; corporate bond market; sovereign bonds; statistics; coupon bond; time series; covariance; denominated bonds; bond indenture; bond issues; difference equations; government bond; descriptive statistics; financial institutions; financial systems; sample mean; standard error; bond rating; discount bond; bond turnover; fixed effects model; benchmark bonds; local bond; currency risk; local bond market; empirical model; correlations; stock exchange; benchmark bond; covariances; financial economics; financial markets; standard deviation; standard errors; bond issuances; cash flow; calibration; bond returns; dummy variable; eurobonds; rate bonds; stock price; derivative; outstanding bonds; denominated bond; emerging bond markets; international capital; international financial markets; bond trading; hedging; domestic -currency; government bond yield; treasury bonds; valuation of assets; corporate bond markets; estimation of equation; probability theory; predictions; financial fragility; bond principal; hypothesis testing; survey; bond ratings; bond valuation; present value; brownian motion process; international reserves; financial market; discount bonds; supply of bonds; international capital markets; regression analysis; outlier; financial regulations;

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References

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Cited by:
  1. Bank for International Settlements, 2007. "Financial stability and local currency bond markets," CGFS Papers, Bank for International Settlements, number 28, July.
  2. Jennie Bai & Shang-Jin Wei, 2012. "When Is There a Strong Transfer Risk from the Sovereigns to the Corporates? Property Rights Gaps and CDS Spreads," NBER Working Papers 18600, National Bureau of Economic Research, Inc.
  3. Paul Mizen & Serafeim Tsoukas, 2008. "Evidence on the External Finance Premium from the US and Emerging Asian Corporate Bond Markets," Working Papers 142008, Hong Kong Institute for Monetary Research.
  4. Eduardo A. Cavallo & Patricio Valenzuela, 2010. "The determinants of corporate risk in emerging markets: an option-adjusted spread analysis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 15(1), pages 59-74.
  5. 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, vol. 23(2), pages 64-74.
  6. Paul Mizen & Serafeim Tsoukas, 2012. "The response of the external finance premium in Asian corporate bond markets to financial characteristics, financial constraints and two financial crises," Working Papers 2012_08, Business School - Economics, University of Glasgow.
  7. Sonja Keller & Ashoka Mody, 2010. "International Pricing of Emerging Market Corporate Debt," IMF Working Papers 10/26, International Monetary Fund.

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