The authors analyze some aspects of the market for Brady bonds (restructured debt in developing countries). They focus on how the debt crisis in Mexico in 1994 affected risk assessment (as measured by the stripped spread) in other Brady countries, especially Poland. Their main finding: The risk premium (in a single country) has a behavior (one unit root), consistent with the hypothesis that it reflects new market information. Among stripped yields, co-movements of sovereign risk premia were stronger during the period of highest volatility in the Mexican crisis. In the case study of Mexico and Poland, they do not reject cointegration for the period July 1994-July 1995; they do reject it for July 1995-July 1996. The crisis had a strong permanent effect on risk assessment in Mexico (about 55 basis points). Different Brady bonds responded differently to the Mexican crisis. Countries with similar pre-crisis means and volatility reacted similarly (in terms of absolute deviation and the degree of co-movement with the Mexican bonds). Other factors (region, oil producers, date of Brady deal) did not explain observed patterns. There was convergence of volatility during the highly volatile period of the Mexican crisis. These results suggest that traders'behavior in assessing the sovereign risk of Brady countries is not constant over time, and responds especially to the level of market uncertainty. Herd behavior increases with risk, leading (in a volatile environment) to even more volatility. Learning is likely to spill over because traders have limited experience with, and limited information about, developing countries. The decrease in co-movements of sovereign risk premia in the second period of the sample could indicate that markets were learning -that is, gathering information about, and experience in, the developing countries, so that the issue of learning spillover was less relevant. But it could also signal that no relevant shock existed to generate such spillover effects, although the market was still vulnerable to country-specific shocks. On that issue, further research is needed.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Barry Eichengreen & Andrew K. Rose & Charles Wyplosz, 1996.
"Contagious Currency Crises,"
NBER Working Papers
5681, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Other versions:
Scharfstein, David. & Stein, Jeremy C., 1988.
"Herd behavior and investment,"
Working papers
WP 2062-88., Massachusetts Institute of Technology (MIT), Sloan School of Management.
[Downloadable!]
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)