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What Explains Changing Spreads on Emerging-Market Debt: Fundamentals or Market Sentiment?

  • Barry Eichengreen
  • Ashoka Mody

In this paper we analyze data on nearly 1,000 developing-country bonds issued in the years 1991-96 the recent episode of heavy reliance on bonded debt. We analyze both the issue decision of debtors and the pricing decision of investors, minimizing selectivity bias by treating the two issues jointly. Overall, the results confirm that higher credit quality translates into a higher probability of issue and a lower spread. Importantly, however, we find that observed changes in fundamentals explain only a fraction of the spread compression in the period leading up to the recent crisis in emerging markets.

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File URL: http://www.nber.org/papers/w6408.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6408.

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Date of creation: Feb 1998
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Publication status: published as Barry Eichengreen & Ashoka Mody, 2000. "What Explains Changing Spreads on Emerging Market Debt?," NBER Chapters, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 107-136 National Bureau of Economic Research, Inc.
Handle: RePEc:nbr:nberwo:6408
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  1. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
  2. Diamond, Douglas W, 1991. "Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 689-721, August.
  3. Guillermo A. Calvo & Enrique G. Mendoza, 1996. "Mexico's balance-of-payments crisis: a chronicle of death foretold," International Finance Discussion Papers 545, Board of Governors of the Federal Reserve System (U.S.).
  4. Hajivassiliou, V. A., 1989. "Do the secondary markets believe in life after debt?," Policy Research Working Paper Series 252, The World Bank.
  5. Mody, Ashoka & Yuko Kinoshita, 1997. "The usefulness of private and public information for foreign investment decisions," Policy Research Working Paper Series 1733, The World Bank.
  6. Richard Cantor & Frank Packer, 1994. "The credit rating industry," Quarterly Review, Federal Reserve Bank of New York, issue Sum, pages 1-26.
  7. Lee, Suk Hun, 1993. "Are the credit ratings assigned by bankers based on the willingness of LDC borrowers to repay?," Journal of Development Economics, Elsevier, vol. 40(2), pages 349-359, April.
  8. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, vol. 47(1), pages 153-61, January.
  9. Huizinga, H.P., 1989. "The commercial bank claims on developing countries : How have the banks been affected?," Other publications TiSEM 1c3c7fe3-3bdf-42d9-9f7c-6, Tilburg University, School of Economics and Management.
  10. William R. Cline, 1995. "International Debt Reexamined," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 46, December.
  11. Ilmanen, Antti, 1995. " Time-Varying Expected Returns in International Bond Markets," Journal of Finance, American Finance Association, vol. 50(2), pages 481-506, June.
  12. International Monetary Fund, 1996. "The Economic Content of Indicators of Developing Country Creditworthiness," IMF Working Papers 96/9, International Monetary Fund.
  13. Richard Cantor & Frank Packer, 1995. "Sovereign credit ratings," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 1(Jun).
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