The Determinants of Corporate Risk in Emerging Markets: An Option-Adjusted Spread Analysis
IMF Working Papers, September 1, 2007
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- The Determinants of Corporate Risk in Emerging Markets: An Option-Adjusted Spread Analysis
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Bibliographic details
- Authors: Eduardo A. Cavallo, Patricio A Valenzuela
- Published: September 1, 2007
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451867923.001
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.
- The paper finds two asymmetries:
- The sovereign ceiling "lite" hypothesis: the transfer of risk from the sovereign to the private sector is less than 1 to 1.
- Market panic asymmetry: panics are common in emerging markets where investors are less informed and more prone to herding.
Key findings and determinants
- Determinants identified:
- Firm-specific variables
- Bond characteristics
- Macroeconomic conditions
- Sovereign risk
- Global factors
- Variance decomposition:
- Firm-level characteristics account for the larger share of the variance (exact shares not provided in the source summary).
- Asymmetric effects:
- Sovereign-to-private risk transfer is less than 1 to 1 (sovereign ceiling "lite").
- Evidence consistent with more frequent panics in emerging markets driven by limited information and herding.