Predictability of Emerging Market Credit Spreads Before and After Lehman Brothers: The Role of Macroeconomic Volatility

Abstract

This paper investigates the quarter-ahead predictability of Brazil, Mexico, Philippines and Turkey credit spreads for short and long maturity bonds during two separate periods preceding and following the Lehman Brothers' default. A model based on the current country-specic credit spread curve predicts no better than the random walk and slope regression benchmarks. Extensions with the global yield curve factors and short-term interest rate volatility notably outperform the benchmark models post-Lehman. Our ndings suggest that uncertainty indicators, both global and domestic, contain information about future credit spreads and that bond prices did better align with fundamentals post-crisis.