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

Author/Editor:

Eduardo A. Cavallo ; Patricio A Valenzuela

Publication Date:

September 1, 2007

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This study explores the determinants of corporate bond spreads in emerging markets 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 with 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.

Series:

Working Paper No. 2007/228

Subject:

Bonds Corporate bonds Currencies Stocks Yield curve

English

Publication Date:

September 1, 2007

ISBN/ISSN:

9781451867923/1018-5941

Stock No:

WPIEA2007228

Pages:

24

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