Kucuk, Ugur N. (2010): Non-default Component of Sovereign Emerging Market Yield Spreads and its Determinants: Evidence from Credit Default Swap Market. Published in: The Journal of Fixed Income , Vol. 19, No. Spring 2010 (4 April 2010): pp. 44-66.
Preview |
PDF
MPRA_paper_27428.pdf Download (741kB) | Preview |
Abstract
This article shows that a sizable component of emerging market sovereign yield spreads is due to factors other than default risk, such as liquidity. The author estimates 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. The large positive basis for speculative-grade bonds supports the existence of speculation in the CDS market when the underlying's credit quality is bad. The author studies 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. The results 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.
Item Type: | MPRA Paper |
---|---|
Original Title: | Non-default Component of Sovereign Emerging Market Yield Spreads and its Determinants: Evidence from Credit Default Swap Market |
Language: | English |
Keywords: | Emerging Market Sovereign Bonds, Credit Risk, Credit Default Swaps, Basis, Liquidity, Emerging Market Equity Markets |
Subjects: | G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets G - Financial Economics > G0 - General G - Financial Economics > G1 - General Financial Markets > G10 - General |
Item ID: | 27428 |
Depositing User: | Ugur Namik Kucuk |
Date Deposited: | 17 Dec 2010 00:39 |
Last Modified: | 27 Sep 2019 17:23 |
References: | Acharya, V. V., & Pedersen, L. H. (2005). Asset pricing with liquidity risk. Journal of Financial Economics , 175-410. Alexander, G., Edwards, A., & Ferri, M. (2004). The determinants of trading volume of high-yield corporate bonds. Journal of Financial Markets , 177-204. Amihud, Y. (2002). Illiquididy and stock returns: Cross-section and time-series effects. Journal of Financial Markets , 31-56. Amihud, Y., & Mendelson, H. (1986). Asset pricing and bid-ask spreads. Journal of Financial Economics , 223-249. Ammer, J., & Cai, F. (2007). Sovereign CDS and bond pricing dynamics in emerging markets: Does the cheapest-to-deliver option matter? FRB International Finance Discussion Paper . Blanco, R., Brennan, S., & March, I. (2005). An empirical analysis of the dynamic relationship between investment-grade bonds and credit default swaps. Journal of Finance , 60, 2255-2281. Chakravarty, S., & Sarkar, A. (2003). Trading costs in three US bond markets. Journal of Fixed Income , 39-48. Chen, L., Lesmond, D., & Wei, J. (2007). Corporate yield spreads and bond illiquidity. Journal of Finance , 119-149. Collin-Dufresne, P., Goldstein, R., & Spencer, M. (2001). The determinants of credit spread changes. Journal of Finance , 56, 2177-2207. Deliandeis, G., & Geske, R. (2001). The components of corporate credit spreads: Default, recovery, tax, jumps, liquidity and marcet factors. UCLA . Duffee, G. (1999). Estimationg the price of default risk. Review of Financial Studies , 12, 197-226. Duffee, G. (1996). Idiosyncratic variations in treasury bill yields. Journal of Finance , 51, 527-551. Duffie, D. (1999). Credit swap valuation. Financial Analysts Journal , 73-87. Duffie, D., & Liu, J. (2001). Floating-fixed credit spreads. Financial Analyst Journal , 76-87. Edwards, A., Harris, L., & Piwowar, M. (2007). Corporate bond market transaction costs and transparency. Journal of Finance , 62, 1421-1431. Elton, E., Gruber, M., Mann, A., & Mann, C. (2001). Explaining the rate spread on corporate bonds. Journal of Finance , 56, 247-277. Eom, Y. H., Helwege, J., & Huang, J. (2004). Structural models of corporate bond pricing: an empirical analysis. Review of Financial Studies , 17, 499–544. Ericsson, J., & Renault, O. (2006). Liquidity and credit risk. Journal of Finance , 61, 2219–2250. Ericsson, J., Reneby, J., & Wang, H. (2007). Can structural models price default risk? Evidence from bond and credit derivative markets. McGill University Working Paper . Fisher, L. (1956). Determinants of the risk premiums on corporate bonds. Journal of Political Economy , 67, 217–237. Fleming, M. J. (2003). Measuring treasury market liquidity. Federal Reserve Bank of New York Economic Policy Review , 9, 83–108. Han, S., & Zhou, H. (2008). Effects of Liquidity on the Nondefault Component of Corporate Yield Spreads: Evidence from Intraday Transactions Data. Federal Reserve Discussion Working Paper . Hong, G., & Warga, A. (2000). An empirical study of corporate bond market. Financial Analyst Journal , 56, 32–46. Hotchkiss, E., & Jostiva, G. (n.d.). Determinants of corporate bond trading: A comprehensive analysis. Boston College Working Paper . Hotchkiss, E., & Ronen, T. (2002). The informational efficiency of the corporate bond market: an intraday analysis. Review of Financial Studies , 15, 1325–1354. Houweling, P., & Vorst, T. (2005). Pricing default swaps: Empirical evidence. Journal of International Money and Finance , 24, 1200–1225. Houweling, P., Mentink, A., & Vorst, T. (2005). Comparing possible proxies of corporate bond liquidity. Journal of Banking and Finance , 29, 1331-1358. Huang, J., & Zhou, H. (2007). Specification analysis of structural credit risk models. Pennsylvania State University Working Paper . Hull, J., & White, A. (2001). Valuing Credit Default Swaps I: No counterparty risk’ Journal of Derivatives. Journal of Derivatives , 8, 29-40. Hull, J., Predescu, M., & White, A. (2004). The relationship between credit default swap spreads, bond yields, and credit rating announcements. Journal of Banking and Finance , 28, 2789–2811. Hund, J., & Lesmond, D. (2006). Liquidity and Credit Risk in Emerging Debt Markets. Working Paper . Jones, E. P., & Rosenfeld, E. (1984). Contingent claims analysis of corporate capital structures:An empirical investigation’,. Journal of Finance , 39, 611–625. Kyle, A. (1985). Continuous auctions and insider trading. Econometrica , 53, 1315-1335. Lando, D. (2004). Credit risk modeling. Theory and applications. Princeton University Press. Liu, J., A., L. F., & Mandell, R. (2006). The market price of risk in interestrate swaps: The roles of default and liquidity risks. Journal of Business , 79(5), 2337–59. Lo, A. W., Mamaysky, H., & Wang, J. (2004). Asset prices and trading volume under fixed transactions costs. Journal of Political Economy , 112, 1054–1090. Loffler, G., & Peter, P. (2007). Credit Risk Modeling Using Excel and VBA. Wiley Finance. Longstaff, F. A. (2004). The flight-to-liquidity premium in u.s. treasury bond prices. Journal of Business , 77, 511–526. Longstaff, F. A., Mithal, S., & Neis, E. (2005). Corporate yield spreads: Default risk or liquidity? new evidence from the credit default swap market. Journal of Finance , 60, 2213-53. Longstaff, F., & Schwartz, E. (1995). A simple approach to valuing risky fixed and floating rate debt. Journal of Finance , 50, 789–820. Longstaff, F., Pan, J., Pedersen, L., & Singleton, K. (2006). How sovereign is sovereign credit risk? NBER Working Paper . Nashikkar, A., & Subrahmanyam, M. (2007). Latent liquidity and corporate bond yield spreads. School of Business, New York University. Working Paper . Norden, L., & Weber, M. (2004). The comovement of credit default swap, bond and stock markets: an empirical analysis. Working paper. University of Mannheim, Germany . Petersen, M. (2008). Estimating standard errors in finance panel data sets: comparing approaches. The Review of Financial Studies . Roll, R. (1984). A simple implicit measure of the effective bid-ask spread in an efficient market. Journal of Finance . Schultz, P. (2001). Corporate bond trading costs: A peek behind the curtain. Journal of Finance , 56, 677-698. Tang, D., & Hong, Y. (2007). Liquidity and credit default swap spreads. University of South Carolina Working Paper . Vayanos, D. (1998). Transaction costs and asset prices: A dynamic equilibrium model’,. Review of Financial Studies , 11, 1-58. Zhu, H. (2006). An empirical comparison of credit spreads between the bond market and the credit default swap market. Journal of Financial Services Research , 29(3), 211–35. |
URI: | https://mpra.ub.uni-muenchen.de/id/eprint/27428 |