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Uncovering country risk in emerging market bond prices

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  • Erik Durbin
  • David Tat-Chee Ng

Abstract

We investigate the role of "country risk" in determining the default risk of firms in emerging markets. In particular, we study the relationship between the secondary market spreads (over hard-currency government bond yields) of bonds issued by emerging market firms and bonds issued by their home governments over the past 3 1/2 years. Our results indicate that market participants do not strictly apply the "sovereign ceiling," under which no firm is more creditworthy than its government. We do find that the spreads of emerging market corporate and government bonds over hard-currency government bonds are highly correlated. The correlation is higher for some industries than for others, and we find no evidence that banks face greater country risk.

Suggested Citation

  • Erik Durbin & David Tat-Chee Ng, 1999. "Uncovering country risk in emerging market bond prices," International Finance Discussion Papers 639, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:639
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    File URL: http://www.federalreserve.gov/pubs/ifdp/1999/639/default.htm
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    File URL: http://www.federalreserve.gov/pubs/ifdp/1999/639/ifdp639.pdf
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    References listed on IDEAS

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    1. Boehmer, Ekkehart & Megginson, William L, 1990. " Determinants of Secondary Market Prices for Developing Country Syndicated Loans," Journal of Finance, American Finance Association, vol. 45(5), pages 1517-1540, December.
    2. Frederic S. Mishkin, 1996. "Understanding Financial Crises: A Developing Country Perspective," NBER Working Papers 5600, National Bureau of Economic Research, Inc.
    3. Harvey, Campbell R, 1995. "Predictable Risk and Returns in Emerging Markets," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 773-816.
    4. Claessens, Stijn & Pennacchi, George, 1996. "Estimating the Likelihood of Mexican Default from the Market Prices of Brady Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(01), pages 109-126, March.
    5. Claessens, Stijn & Dasgupta, Susmita & Glen, Jack, 1995. "Return Behavior in Emerging Stock Markets," World Bank Economic Review, World Bank Group, vol. 9(1), pages 131-151, January.
    6. 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.
    7. Bekaert, Geert & Harvey, Campbell R., 1997. "Emerging equity market volatility," Journal of Financial Economics, Elsevier, vol. 43(1), pages 29-77, January.
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    Cited by:

    1. Lizarazo, Sandra Valentina, 2013. "Default risk and risk averse international investors," Journal of International Economics, Elsevier, vol. 89(2), pages 317-330.
    2. Radovan Vadovic, 2009. "Early, Late, and Multiple Bidding in Internet Auctions," Working Papers 0904, Centro de Investigacion Economica, ITAM.
    3. Fernandez, Pablo, 2003. "75 common and uncommon errors in company valuation," IESE Research Papers Db/515, IESE Business School.
    4. Pablo Fernández & Andrada Bilan, 2013. "110 Common Errors in Company Valuations," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(1), pages 33-78.
    5. Galati, Davide & Sitzia, Bruno, 2000. "Sovereign bond ratings and market spreads. a dynamic panel analysis," MPRA Paper 8984, University Library of Munich, Germany.
    6. Fernandez, Pablo, 2004. "80 common and uncommon errors in company valuation," IESE Research Papers D/550, IESE Business School.

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    Keywords

    Risk ; Bonds ; Credit ; Developing countries;

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