Non-default Component of Sovereign Emerging Market Yield Spreads and its Determinants: Evidence from Credit Default Swap Market. In this paper, I show that a sizable component of emerging market sovereign yield spreads is due to factors other than default risk such as liquidity. I estimate the non-default component of the yield spreads as the basis between the actual credit default swap (CDS) premium and the hypothetical CDS premium implied by emerging market bond yields. On average, the basis is large and positive for speculative grade bonds and slightly negative for investment grade bonds. Large positive basis for speculative grade bonds support the existence of speculation in the CDS market when the underling’s credit quality is bad. I study the effects of bond liquidity, liquidity in the CDS market, equity market performance and macroeconomic variables on the non-default component of the emerging market yield spreads. I show that bond liquidity has a significant and positive effect on the CDS-bond basis of investment grade bonds. The results suggest that the liquid bonds of investment grade bonds are more expensive relative to the prices implied their CDS premiums. However, the results are somewhat mixed and even contrary for the speculative grade bond sample.

Kucuk, U.N. (2010). Three essays in asset pricing of sovereign fixed income instruments.

Three essays in asset pricing of sovereign fixed income instruments

KUCUK, UGUR NAMIK
2010-07-12

Abstract

Non-default Component of Sovereign Emerging Market Yield Spreads and its Determinants: Evidence from Credit Default Swap Market. In this paper, I show that a sizable component of emerging market sovereign yield spreads is due to factors other than default risk such as liquidity. I estimate the non-default component of the yield spreads as the basis between the actual credit default swap (CDS) premium and the hypothetical CDS premium implied by emerging market bond yields. On average, the basis is large and positive for speculative grade bonds and slightly negative for investment grade bonds. Large positive basis for speculative grade bonds support the existence of speculation in the CDS market when the underling’s credit quality is bad. I study the effects of bond liquidity, liquidity in the CDS market, equity market performance and macroeconomic variables on the non-default component of the emerging market yield spreads. I show that bond liquidity has a significant and positive effect on the CDS-bond basis of investment grade bonds. The results suggest that the liquid bonds of investment grade bonds are more expensive relative to the prices implied their CDS premiums. However, the results are somewhat mixed and even contrary for the speculative grade bond sample.
A.A. 2009/2010
ECONOMIA DELLE ISTITUZIONI E DEI MERCATI MONETARI E FINANZIARI
21.
emerging market sovereign bonds; excess returns; sovereign bond market; credit risk; credit default swaps; basis; liquidity; emerging market equity markets; local currency bonds; financial markets; emerging markets; bond portfolio
Settore SECS-P/01 - Economia Politica
English
Tesi di dottorato
Kucuk, U.N. (2010). Three essays in asset pricing of sovereign fixed income instruments.
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/2108/1322
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