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The Sovereign Ceiling and Emerging Market Corporate Bond Spreads

  • Durbin, Erik
  • Ng, David T.C.
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We use the spreads of emerging market bonds traded in secondary markets to study investors’ perception of country risk. Speci...cally, we ask whether investors apply the “sovereign ceiling,” which says that no ...rm is more creditworthy than its government. To do this we compare the spreads of bonds issued by ...rms to those of bonds issued by the ...rms’ home governments. We ...nd several cases where a ...rm’s bond trades at a lower spread than that of the ...rm’s government, indicating that investors do not always apply the sovereign ceiling. Bonds for which this is true tend to have substantial export earnings and/or a close relationship with either a foreign ...rm or with the home government. For countries with lower perceived default risk, we ...nd that investors do not believe that whenever the government defaults, the ...rm will default.

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File URL: http://purl.umn.edu/127286
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Paper provided by Cornell University, Department of Applied Economics and Management in its series Working Papers with number 127286.

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Date of creation: Jun 2002
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Handle: RePEc:ags:cudawp:127286
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  1. Barry Eichengreen & Ashoka Mody, 1998. "What Explains Changing Spreads on Emerging-Market Debt: Fundamentals or Market Sentiment?," NBER Working Papers 6408, National Bureau of Economic Research, Inc.
  2. Frederic S. Mishkin, 1996. "Understanding Financial Crises: A Developing Country Perspective," NBER Working Papers 5600, National Bureau of Economic Research, Inc.
  3. Domowitz, Ian & Glen, Jack & Madhavan, Ananth, 1998. "Country and Currency Risk Premia in an Emerging Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(02), pages 189-216, June.
  4. Edwin J. Elton, 2001. "Explaining the Rate Spread on Corporate Bonds," Journal of Finance, American Finance Association, vol. 56(1), pages 247-277, 02.
  5. Donald R. Lessard, 1996. "Incorporating Country Risk In The Valuation Of Offshore Projects," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(3), pages 52-63.
  6. Tom Keck & Eric Levengood & AL Longfield, 1998. "Using Discounted Cash Flow Analysis In An International Setting: A Survey Of Issues In Modeling The Cost Of Capital," Journal of Applied Corporate Finance, Morgan Stanley, vol. 11(3), pages 82-99.
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