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What Explains Changing Spreads on Emerging-Market Debt: Fundamentals or Market Sentiment?

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  • Barry Eichengreen
  • Ashoka Mody

Abstract

In this paper we analyze data on nearly 1,000 developing-country bonds issued in the years 1991-96 the recent episode of heavy reliance on bonded debt. We analyze both the issue decision of debtors and the pricing decision of investors, minimizing selectivity bias by treating the two issues jointly. Overall, the results confirm that higher credit quality translates into a higher probability of issue and a lower spread. Importantly, however, we find that observed changes in fundamentals explain only a fraction of the spread compression in the period leading up to the recent crisis in emerging markets.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6408.

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Date of creation: Feb 1998
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Publication status: published as Barry Eichengreen & Ashoka Mody, 2000. "What Explains Changing Spreads on Emerging Market Debt?," NBER Chapters, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 107-136 National Bureau of Economic Research, Inc.
Handle: RePEc:nbr:nberwo:6408

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  1. International Monetary Fund, 1996. "The Economic Content of Indicators of Developing Country Creditworthiness," IMF Working Papers 96/9, International Monetary Fund.
  2. Hajivassiliou, V. A., 1989. "Do the secondary markets believe in life after debt?," Policy Research Working Paper Series 252, The World Bank.
  3. Ilmanen, Antti, 1995. " Time-Varying Expected Returns in International Bond Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 50(2), pages 481-506, June.
  4. Calvo, Guillermo A. & Mendoza, Enrique G., 1996. "Mexico's balance-of-payments crisis: a chronicle of a death foretold," Journal of International Economics, Elsevier, Elsevier, vol. 41(3-4), pages 235-264, November.
  5. Richard Cantor & Frank Packer, 1995. "Sovereign credit ratings," Current Issues in Economics and Finance, Federal Reserve Bank of New York, Federal Reserve Bank of New York, vol. 1(Jun).
  6. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
  7. William R. Cline, 1995. "International Debt Reexamined," Peterson Institute Press: All Books, Peterson Institute for International Economics, Peterson Institute for International Economics, number 46, July.
  8. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, Elsevier, vol. 33(1), pages 3-56, February.
  9. Mody, Ashoka & Yuko Kinoshita, 1997. "The usefulness of private and public information for foreign investment decisions," Policy Research Working Paper Series 1733, The World Bank.
  10. Richard Cantor & Frank Packer, 1994. "The credit rating industry," Quarterly Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Sum, pages 1-26.
  11. Huizinga, H.P., 1989. "The commercial bank claims on developing countries: How have the banks been affected?," Open Access publications from Tilburg University urn:nbn:nl:ui:12-155107, Tilburg University.
  12. Lee, Suk Hun, 1993. "Are the credit ratings assigned by bankers based on the willingness of LDC borrowers to repay?," Journal of Development Economics, Elsevier, Elsevier, vol. 40(2), pages 349-359, April.
  13. Diamond, Douglas W, 1991. "Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(4), pages 689-721, August.
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