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International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page Uncovering Country Risk in Emerging Market Bond Prices
Erik Durbin; David Tat-Chee Ng
1999-639  (July 1999)

Abstract:  We investigate the role of "country risk" in determining the default risk of firms in emerging markets. In particular, we study the relationship between the secondary market spreads (over hard-currency government bond yields) of bonds issued by emerging market firms and bonds issued by their home governments over the past 3 1/2 years. Our results indicate that market participants do not strictly apply the "sovereign ceiling," under which no firm is more creditworthy than its government. We do find that the spreads of emerging market corporate and government bonds over hard-currency government bonds are highly correlated. The correlation is higher for some industries than for others, and we find no evidence that banks face greater country risk.

Full paper (222 KB PDF)

Keywords
Credit rating, sovereign ceiling, default risk, emerging market, corporate bond

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Last update: July 19, 2001