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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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Related research

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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  1. Marcel Peter, 2002. "Estimating Default Probabilities of Emerging Market Sovereigns: A New Look at a Not-So-New Literature," IHEID Working Papers 06-2002, Economics Section, The Graduate Institute of International Studies.
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  14. Martin Grandes & Marcel Peter & Nicolas Pinaud, 2003. "The Currency Premium and Local-Currency Denominated Debt Costs in South Africa," OECD Development Centre Working Papers 230, OECD Publishing.
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  19. Jarrow, Robert A & Lando, David & Turnbull, Stuart M, 1997. "A Markov Model for the Term Structure of Credit Risk Spreads," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 481-523.
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Citations

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Cited by:
  1. Bai, Jennie & Wei, Shang-Jin, 2012. "When Is There a Strong Transfer Risk from the Sovereigns to the Corporates? Property Rights Gaps and CDS Spreads," CEPR Discussion Papers 9252, C.E.P.R. Discussion Papers.
  2. Eduardo A. Cavallo & Patricio Valenzuela, 2007. "The Determinants of Corporate Risk in Emerging Markets: An Option-Adjusted Spread Analysis," Research Department Publications 4513, Inter-American Development Bank, Research Department.
  3. Paul Mizen & Serafeim Tsoukas, . "Evidence on the external finance premium from the US and emerging Asian corporate bond markets," Discussion Papers 06/04, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  4. Bank for International Settlements, 2007. "Financial stability and local currency bond markets," CGFS Papers, Bank for International Settlements, number 28, January.
  5. Mizen, Paul & Tsoukas, Serafeim, 2012. "The response of the external finance premium in Asian corporate bond markets to financial characteristics, financial constraints and two financial crises," Journal of Banking & Finance, Elsevier, vol. 36(11), pages 3048-3059.
  6. Sonja Keller & Ashoka Mody, 2010. "International Pricing of Emerging Market Corporate Debt," IMF Working Papers 10/26, International Monetary Fund.
  7. 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.

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