## The Brady-Euro Yield Differential Debate: Why Arbitrage is Infeasible

_IMF Working Papers, November 1, 1996_

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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

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### 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*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/the-brady-euro-yield-differential-debate-why-arbitrage-is-infeasible-2043_