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The determinants of corporate risk in emerging markets: an option-adjusted spread analysis

  • Eduardo A. Cavallo

    (Inter-American Development Bank, Research Department, USA)

  • Patricio Valenzuela

    (European University Institute, Economics Department, Italy)

This study explores the determinants of corporate bond spreads in emerging markets economies. Using a largely unexploited data set, the paper finds that corporate bond spreads are determined by firm-specific variables, bond characteristics, macroeconomic conditions, country-specific sovereign risk, and global factors. A variance decomposition analysis shows that firm-level performance indicators account for the larger share of the variance. In addition, the paper finds that corporate spreads respond more acutely to sovereign and global risk increases rather than to decreases. This suggests two asymmetries prevalent in the data. The first is in line with the sovereign ceiling 'lite' hypothesis, which states that it appears from spreads data that sovereign risk remains a significant determinant of corporate risk although credit rating agencies have gradually moved away from a policy of never rating a corporate above the sovereign. The second is consistent with the popular notion that panics are common in emerging markets where investors are less informed and more prone to herding. Copyright © 2009 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/ijfe.398
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Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 15 (2010)
Issue (Month): 1 ()
Pages: 59-74

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Handle: RePEc:ijf:ijfiec:v:15:y:2010:i:1:p:59-74
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  1. Barry Eichengreen & Ricardo Hausmann & Ugo Panizza, 2003. "Currency Mismatches, Debt Intolerance and Original Sin: Why They Are Not the Same and Why it Matters," NBER Working Papers 10036, National Bureau of Economic Research, Inc.
  2. Enrique G. Mendoza & Guillermo A. Calvo, 2000. "Capital-Markets Crises and Economic Collapse in Emerging Markets: An Informational-Frictions Approach," American Economic Review, American Economic Association, vol. 90(2), pages 59-64, May.
  3. John Y. Campbell & Glen B. Taksler, 2002. "Equity Volatility and Corporate Bond Yields," Harvard Institute of Economic Research Working Papers 1945, Harvard - Institute of Economic Research.
  4. Durbin, Erik & Ng, David, 2005. "The sovereign ceiling and emerging market corporate bond spreads," Journal of International Money and Finance, Elsevier, vol. 24(4), pages 631-649, June.
  5. Mitchell A. Petersen, 2005. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," NBER Working Papers 11280, National Bureau of Economic Research, Inc.
  6. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  7. Oriana Bandiera & Gerard Caprio Jr. & Patrick Honohan & Fabio Schiantarelli, 1998. "Does Financial Reform Raise or Reduce Savings?," Boston College Working Papers in Economics 413, Boston College Department of Economics.
  8. Marcel Peter & Martín Grandes, 2005. "How Important is Sovereign Risk in Determining Corporate Default Premia? the Case of South Africa," IMF Working Papers 05/217, International Monetary Fund.
  9. Eduardo Borensztein & Patricio Valenzuela & Kevin Cowan, 2007. "Sovereign Ceilings "Lite"? T+L3712he Impact of Sovereign Ratingson Corporate Ratings in Emerging Market Economies," IMF Working Papers 07/75, International Monetary Fund.
  10. Christopher F Baum & Mark E Schaffer & Steven Stillman, 2002. "IVREG2: Stata module for extended instrumental variables/2SLS and GMM estimation," Statistical Software Components S425401, Boston College Department of Economics, revised 09 Feb 2015.
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