Emerging Market Bond Returns – An Investor Perspective
AbstractThe last twenty five years provided international investors in sovereign bonds of emerging market countries with a colourful experience consisting of several defaults that resulted in protracted, frustrating and – most importantly – costly salvage operations. It therefore appears natural to ask how investors have priced sovereign bonds under these challenging conditions. The novel feature of this study consists in applying a conventional multifactor global market model to emerging market sovereign bond index rates of return that are denominated in US dollars and subsequently relating the unexplained residual from the market model’s estimates of each country’s total bond index return to country specific factors. They include political and financial risks as well as other presumed determinants of bond index rates of return. The estimation approach allows us to separate out the common influences of global bond market movements from the country-specific influences that drive rates of return on the outstanding bonds of 19 emerging market countries from Latin America, Transition Economies, Asian and African countries. The results of our study confirm that sovereign countries’ bond index rates of return that include interest payments and capital gains/losses may be explained in terms of conventional bond pricing models by combining global market factors with local risk and other country-specific influences. Unsurprisingly, emerging market bonds appear to be dancing to different tunes than those in developed economies.
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Bibliographic InfoPaper provided by Macquarie University, Department of Economics in its series Research Papers with number 0406.
Length: 31 pages.
Date of creation: Aug 2004
Date of revision:
Emerging bond markets; International investments; Sovereign bonds;
Find related papers by JEL classification:
- F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
- F30 - International Economics - - International Finance - - - General
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-05-20 (All new papers)
- NEP-CFN-2006-05-20 (Corporate Finance)
- NEP-FIN-2006-05-20 (Finance)
- NEP-FMK-2006-05-20 (Financial Markets)
- NEP-SEA-2006-05-20 (South East Asia)
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