Premium
The determinants of corporate risk in emerging markets: an option‐adjusted spread analysis
Author(s) -
Cavallo Eduardo A.,
Valenzuela Patricio
Publication year - 2010
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.398
Subject(s) - corporate bond , emerging markets , herding , economics , sovereignty , credit risk , credit rating , bond , variance decomposition of forecast errors , monetary economics , variance (accounting) , financial economics , business , financial system , econometrics , finance , accounting , politics , political science , law , forestry , geography
This study explores the determinants of corporate bond spreads in emerging markets economies. Using a largely unexploited data set, the paper finds that corporate bond spreads are determined by firm‐specific variables, bond characteristics, macroeconomic conditions, country‐specific sovereign risk, and global factors. A variance decomposition analysis shows that firm‐level performance indicators account for the larger share of the variance. In addition, the paper finds that corporate spreads respond more acutely to sovereign and global risk increases rather than to decreases. This suggests two asymmetries prevalent in the data. The first is in line with the sovereign ceiling ‘lite’ hypothesis, which states that it appears from spreads data that sovereign risk remains a significant determinant of corporate risk although credit rating agencies have gradually moved away from a policy of never rating a corporate above the sovereign. The second is consistent with the popular notion that panics are common in emerging markets where investors are less informed and more prone to herding. Copyright © 2009 John Wiley & Sons, Ltd.