Emerging Market Spreads: Then versus Now

Mauro, Paolo; Sussman, Nathan; Yafeh, Yishay

doi:10.1162/003355302753650364

Cited by 229 publications

(135 citation statements)

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“…4 Few papers concentrate instead on the determinants of sovereign spreads in the EMU and the issue of contagion among sovereign securities within the EMU. 5 Our paper complements and extends this literature by investigating the degree of co-movement among sovereign bond spreads (and sovereign CDSs) after controlling 4 For example, see Kamin and von Kleist (1999), Eichengreen and Mody (2000), Mauro, Sussman, and Yafeh (2002), Pan and Singleton (2008), Longstaff, Pan, Pedersen and Singleton (2011) Ang and Longstaff (2011) and Augustin (2013). This body of works shows that the most significant variables for CDS spreads are the US stock and high-yield market returns as well as the volatility risk premium embedded in the VIX index (for a survey on CDS literature see Augustin et al (2014)).…”

Section: Introductionmentioning

confidence: 71%

Measuring Sovereign Contagion in Europe

et al. 2015

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This paper analyzes sovereign risk shift-contagion, i.e. positive and significant changes in the propagation mechanisms, using bond yield spreads for the major Eurozone countries. By emphasizing the use of two econometric approaches based on quantile regressions (standard quantile regression and Bayesian quantile regression with heteroskedasticity) we find that the propagation of shocks in euro's bond yield spreads shows almost no presence of shiftcontagion in the sample periods considered (2003-2006, Nov. 2008-Nov. 2011, Dec. 2011-Apr. 2013).Shock transmission is no different on days with big spread changes and small changes. This is the case even though a significant number of the countries in our sample have been extremely affected by their sovereign debt and fiscal situations.The risk spillover among these countries is not affected by the size or sign of the shock, implying that so far contagion has remained subdued. However, the US crisis, does generate a change in the intensity of the propagation of shocks in the Eurozone between the 2003-2006 pre-crisis period and the Nov. 2008-Nov. 2011 post-Lehman one, but the coefficients actually go down, not up! All the increases in correlation we have witnessed over the last years come from larger shocks and the heteroskedasticity in the data, not from similar shocks propagated with higher intensity across Europe.These surprising, but robust, results emerge because this is the first paper, to our knowledge, in which a Bayesian quantile regression approach allowing for heteroskedasticity is used to measure contagion. This methodology is particularly well-suited to deal with nonlinear and unstable transmission mechanisms especially when asymmetric responses to sign and size are suspected. Measuring Sovereign Contagion in Europe April 2015Abstract This paper analyzes sovereign risk shift-contagion, i.e. positive and significant changes in the propagation mechanisms, using bond yield spreads for the major eurozone countries. By emphasizing the use of two econometric approaches based on quantile regressions (standard quantile regression and Bayesian quantile regression with heteroskedasticity) we find that the propagation of shocks in euro's bond yield spreads shows almost no presence of shift-contagion. All the increases in correlation we have witnessed over the last years come from larger shocks propagated with higher intensity across Europe.JEL Classification: E58, F34, F36, G12, G15.

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Section: Introductionmentioning

confidence: 71%

Measuring Sovereign Contagion in Europe

et al. 2015

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“…This defect of merging market launch yield data prompted Mauro et al (2000) to use secondary market yields for their long-term investigation of emerging market spreads.…”

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confidence: 99%

Emerging market bond returns—An investor perspective

Jüttner

Chung

Leung

2006

Journal of Multinational Financial Management

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The last twenty five years provided international investors in sovereign bonds of emerging market countries with a colourful experience consisting of several defaults that resulted in protracted, frustrating and -most importantly -costly salvage operations. It therefore appears natural to ask how investors have priced sovereign bonds under these challenging conditions. The novel feature of this study consists in applying a conventional multifactor global market model to emerging market sovereign bond index rates of return that are denominated in US dollars and subsequently relating the unexplained residual from the market model's estimates of each country's total bond index return to country specific factors. They include political and financial risks as well as other presumed determinants of bond index rates of return. The estimation approach allows us to separate out the common influences of global bond market movements from the country-specific influences that drive rates of return on the outstanding bonds of 19 emerging market countries from Latin America, Transition Economies, Asian and African countries. The results of our study confirm that sovereign countries' bond index rates of return that include interest payments and capital gains/losses may be explained in terms of conventional bond pricing models by combining global market factors with local risk and other country-specific influences. Unsurprisingly, emerging market bonds appear to be dancing to different tunes than those in developed economies.

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“…We attempt to associate these errors with a moral hazard effect. Mauro et al (2002) find that during the 1990s spreads were co-moving more than in the previous 'global' era and that these co-movements tend to be mostly related to global events and not to country specific ones; their interpretation is that investors today pay less attention to country specific information but a moral hazard interpretation can be applied as well. Eichengreen and Mody (2000) try to explain the continuous drop in spreads following the Mexican crisis all the way up to the summer of 1997.…”

Section: On the Empirics Of Bond Spreadsmentioning

confidence: 94%

Do IMF Bailouts Result in Moral Hazard? An Events-Study Approach

Noy

2003

SSRN Journal

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The IMF creates "moral hazard," when it provides bailouts to countries that face a BOP crisis. Two central questions are posed: is moral hazard observable in the data; and, if it is, what is its magnitude? We search for evidence that the unprecedented bailouts of the last decade have changed the investing environment in such a way that international investors started believing that their investments were insured. Our eventsstudy is based on IMF-led events identified as both important and unexpected, such as the bailout loan for Mexico in 1995 and the absence of one for Russia in 1998. Our conclusion is negative: no such change in the moral hazard effect was observed. We demonstrate that events surrounding the out-of-sample On Moral Hazard in International LendingThe last decade has been a decade of spectacular currency, balance-ofpayments and banking crises and equally spectacular and controversial bailouts.The problem of moral hazard in international crisis lending has consequently become very prominent in policy and academic discussions. A concern with moral hazard was one of the principal issues discussed in the Meltzer Commission's report on the International Financial Institutions (Meltzer, 2000). Moral hazard remains as the most prominent reason for criticism against the IMF from several prominent researchers and policymakers (e.g., Calomiris, 2000;Bordo and Schwartz, 2000; Meltzer, 2000;and Niskanen, 1999). Yet, in spite of numerous policy discussions on the topic, very little empirical work to date has been done on this issue. 2The current literature differentiates between moral hazard on the creditors' and on the debtors' sides. From the debtors' perspective, the implied or even explicit insurance/bailout enables domestic borrowers to increase their risk exposure beyond the optimal level in the absence of insurance, as, in case of a negative 1 See Hutchison (2003) for a description of IMF programs and their size. The term 'bailout' is used here, as elsewhere in the literature, even though these support packages are subsidized loans that are almost always repaid on time. The magnitude of the subsidy is debatable since IMF loans face a different default risk than private or even other public lending as IMF loans are almost always paid back on time. For analysis of repayment experiences to the IMF, see Aylward and Thorne (1998). 2 The only exceptions of which we are aware are Lane and Phillips (2000), Dell'Ariccia et al. (2002), Kamin (2002) and Dreher and Vaubel (2001). The last one only examines debtor moral hazard and is therefore not directly related to our work. The other three are surveyed in the next section.3 shock that will leave them unable or unwilling to repay in full, they will be at least partially bailed out.Our work focuses on the other side of a moral hazard in international bailouts -namely the creditors' moral hazard effect. As creditors are aware that they will be bailed out in case of a balance-of-payment crisis in an emerging economy, their behavior changes. This has often b...

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Emerging Market Spreads: Then versus Now

Cited by 229 publications

References 15 publications

Measuring Sovereign Contagion in Europe

Measuring Sovereign Contagion in Europe

Emerging market bond returns—An investor perspective

Do IMF Bailouts Result in Moral Hazard? An Events-Study Approach

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