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The Determinants of Corporate Risk in Emerging Markets: An Option-Adjusted Spread Analysis

  • Eduardo A. Cavallo

    ()

  • Patricio Valenzuela

This study explores the determinants of corporate bond spreads in emerging market economies. Using a largely unexploited dataset, the paper finds that corporate bond spreads are determined by firm-specific variables, bond characteristics, macroeconomic conditions, sovereign risk, and global factors. A variance decomposition analysis shows that firm-level characteristics account for the larger share of the variance. In addition, the paper finds two asymmetries. The first is in line the sovereign ceiling “lite” hypothesis which states that the transfer of risk from the sovereign to the private sector is less than 1 to 1. 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.

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File URL: http://www.iadb.org/research/pub_hits.cfm?pub_id=WP-602&pub_file_name=pubWP-602.pdf
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Paper provided by Inter-American Development Bank, Research Department in its series Research Department Publications with number 4513.

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Date of creation: Apr 2007
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Handle: RePEc:idb:wpaper:4513
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  1. Campbell, John & Taksler, Glen, 2003. "Equity Volatility and Corporate Bond Yields," Scholarly Articles 3153307, Harvard University Department of Economics.
  2. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
  3. 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.
  4. Oriana Bandiera & Gerard Caprio & Patrick Honohan & Fabio Schiantarelli, 2000. "Does Financial Reform Raise or Reduce Saving?," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 239-263, May.
  5. 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.
  6. Durbin, Erik & Ng, David T.C., 2002. "The Sovereign Ceiling and Emerging Market Corporate Bond Spreads," Working Papers 127286, Cornell University, Department of Applied Economics and Management.
  7. 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 19 Jun 2015.
  8. 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.
  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. 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.
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