Credit Cycle Dependent Spread Determinants in Emerging Sovereign Debt Markets PDF Download
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Author: Christoph Riedel
Publisher:
ISBN:
Category :
Languages : en
Pages : 32
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Book Description
We address credit cycle dependent sovereign credit risk determinants. In our model, the spread determinants' magnitude is conditional on an unobservable endogenous sovereign credit cycle as represented by the underlying state of a Markov regime switching process. Our explanatory variables are motivated in the tradition of structural credit risk models and include changes in asset prices, interest rates, implied market volatility, gold price changes and foreign exchange rates. We examine daily frequency variations of U.S. dollar denominated Eurobond credit spreads of four major Latin American sovereign bond issuers (Brazil, Colombia, Mexico and Venezuela) with liquid bond markets during March 2000 to June 2011. We find that spread determinants are statistically significant and consistent with theory, while their magnitude remarkably varies with the state of the credit cycle. Crisis states are characterized by high spread change uncertainty and high sensitivities with respect to the spread change determinants. We further document that not only changes of local currencies, but also changes of the Euro with respect to the U.S. dollar are significant spread drivers and argue that this is consistent with the sovereigns' ability to pay.
Author: Christoph Riedel
Publisher:
ISBN:
Category :
Languages : en
Pages : 32
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Book Description
We address credit cycle dependent sovereign credit risk determinants. In our model, the spread determinants' magnitude is conditional on an unobservable endogenous sovereign credit cycle as represented by the underlying state of a Markov regime switching process. Our explanatory variables are motivated in the tradition of structural credit risk models and include changes in asset prices, interest rates, implied market volatility, gold price changes and foreign exchange rates. We examine daily frequency variations of U.S. dollar denominated Eurobond credit spreads of four major Latin American sovereign bond issuers (Brazil, Colombia, Mexico and Venezuela) with liquid bond markets during March 2000 to June 2011. We find that spread determinants are statistically significant and consistent with theory, while their magnitude remarkably varies with the state of the credit cycle. Crisis states are characterized by high spread change uncertainty and high sensitivities with respect to the spread change determinants. We further document that not only changes of local currencies, but also changes of the Euro with respect to the U.S. dollar are significant spread drivers and argue that this is consistent with the sovereigns' ability to pay.
Author: Mr.Udaibir S. Das
Publisher: International Monetary Fund
ISBN: 1451961944
Category : Business & Economics
Languages : en
Pages : 40
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Book Description
Top down spillovers of sovereign default risk can have serious consequences for the private sector in emerging markets. This paper analyzes the effects of these spillovers using firm-level data from 31 emerging market economies. We assess how sovereign risk affects corporate access to international capital markets, in the form of external credit (loans and bond issuances) and equity issuances. The study first analyzes the impact of sovereign debt crises during the 1980s and 1990s. It goes on to examine the 1993 to 2007 period, using additional measures of sovereign risk-sovereign bond spreads and sovereign ratings-as explanatory variables. Overall, we find that sovereign default risk is a crucial determinant of private sector access to capital, be it external debt or equity. We also find that crisis resolution patterns matter and that defaults towards private creditors have stronger adverse consequences than defaults to official creditors.
Author: Peter Rowland
Publisher:
ISBN:
Category :
Languages : en
Pages : 47
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Author: Alexandre Jeanneret
Publisher:
ISBN:
Category :
Languages : en
Pages : 64
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This paper proposes a structural model for sovereign credit risk with endogenous sovereign debt and default policies. A maximum-likelihood estimation of the model with local stock market prices generates daily model-implied sovereign spreads. This approach explains two-thirds of the daily variation in observed sovereign spreads for emerging and European economies over the 2000-2011 period. Global factors help to further explain the time variation in sovereign credit risk. In particular, sovereign spreads in emerging markets vary with U.S. market uncertainty, while European spreads depend on Euro zone bond factors.
Author: Mr.Giovanni Dell'Ariccia
Publisher: International Monetary Fund
ISBN: 1484359623
Category : Business & Economics
Languages : en
Pages : 54
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Book Description
This paper reviews empirical and theoretical work on the links between banks and their governments (the bank-sovereign nexus). How significant is this nexus? What do we know about it? To what extent is it a source of concern? What is the role of policy intervention? The paper concludes with a review of recent policy proposals.
Author: Jason Z. Ma
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Author: Gergana Jostova
Publisher:
ISBN:
Category :
Languages : en
Pages : 51
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This paper finds strong evidence of predictability in Brady bonds, the most liquid emerging debt market, by implementing a new model for credit spreads. Predictability is economically and statistically significant and robust to various considerations. Active management provides US investors in emerging markets with double the buy-and-hold returns at lower risk and the equivalent of free options on Brady bonds. Our analysis suggests that predictability is primarily driven by credit spread deviations from fundamentals, rather than time-varying risk or risk premia. We believe this inefficiency is the result of the restrictions of a non-transparent, institutionally dominated, dealer market and the lack of a well developed derivatives market for emerging country credit risk.
Author: Uğur N. Küçük
Publisher:
ISBN:
Category :
Languages : en
Pages :
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In this paper, I show that a sizable component of emerging market sovereign yield spreads is due to factors other than default risk such as liquidity. I estimate the non-default component of the yield spreads as the basis between the actual credit default swap (CDS) premium and the hypothetical CDS premium implied by emerging market bond yields. On average, the basis is large and positive for speculative grade bonds and slightly negative for investment grade bonds. This large positive basis for speculative grade bonds support the existence of speculation in the CDS market when the underlying's credit quality is bad. I study the effects of bond liquidity, liquidity in the CDS market, equity market performance and macroeconomic variables on the non-default component of the emerging market yield spreads. I show that bond liquidity has a significant and positive effect on the CDS-bond basis of investment grade bonds. The results suggest that the liquid bonds of investment grade bonds are more expensive relative to the prices implied their CDS premiums. However, the results are somewhat mixed and even contrary for the speculative grade bond sample.
Author: Jens Hilscher
Publisher:
ISBN:
Category :
Languages : en
Pages : 48
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This paper investigates the effects of macroeconomic fundamentals on emerging market sovereign credit spreads. We find that the volatility of terms of trade in particular has a statistically and economically significant effect on spreads. This is robust to instrumenting terms of trade with a country-specific commodity price index. Our measures of country fundamentals have substantial explanatory power, even controlling for global factors and credit ratings. We also estimate default probabilities in a hazard model and find that model implied spreads capture a significant part of the variation in observed spreads out-of-sample. The fit is better for lower credit quality borrowers.
Author: Steven Kamin
Publisher:
ISBN:
Category :
Languages : en
Pages :
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