The Brady-Euro Yield Differential Debate: Why Arbitrage is Infeasible
IMF Working Papers, November 1, 1996
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- The Brady-Euro Yield Differential Debate: Why Arbitrage is Infeasible
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Bibliographic details
- Authors: Federico L. Kaune Moreno, Elaine Karen Buckberg
- Published: November 1, 1996
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451935912.001
Summary and central finding
- Brady bonds offer substantially higher returns than Eurobonds.
- The apparent arbitrage opportunity between Brady bonds and Eurobonds is not only smaller than it at first appears, but is infeasible given the illiquidity of the Eurobond market.
- Given the many crossover investors who are active in both the Brady and Euro markets, the paper asks: why do Eurobond investors not trade them actively?
Key empirical findings
- The maturity adjusted return differential between Brady and Eurobonds is smaller than the commonly cited yield spreads.
- The transactions costs of executing a Eurobond short contract render arbitrage a loss-making proposition.
- Market illiquidity in the Eurobond market is a central constraint on arbitrage despite apparent yield differentials.
Implications and interpretation
- Apparent quoted yield differentials overstate the feasible arbitrage profit once maturity adjustments are applied.
- Even with crossover investors present in both markets, practical market frictions (notably illiquidity and transaction costs for shorting Eurobonds) prevent active arbitrage that would otherwise equalize returns.
Publication metadata and access
- Authors: Federico L. Kaune Moreno, Elaine Karen Buckberg
- Publication date: November 1, 1996
- Series: Working Paper No. 1996/127
- Issue: 127
- Volume: 1996
- Pages: 26
- DOI: https://doi.org/10.5089/9781451935912.001
- Stock No: WPIEA1271996
- ISBN: 9781451935912
- ISSN: 1018-5941
IMF Working Papers — The Brady-Euro Yield Differential Debate: Why Arbitrage is Infeasible