Covid-19 and high-yield emerging market bonds: insights for liquidity risk management

Mariya Gubareva ()
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Mariya Gubareva: Instituto Politécnico de Lisboa

Risk Management, 2021, vol. 23, issue 3, No 1, 193-212

Abstract: Abstract Around the apogee of the pandemic crisis in late March 2020, trading liquidity has evaporated out of high-yield (HY) bond markets across developing states. Concerned about this phenomenon, we assess emerging market (EM) debt liquidity as a combination of three metrics: (i) bid–ask spreads; (ii) relative liquidity score incorporating market depth, trading volumes, and time needed to liquidate an asset; and (iii) round-trip transaction costs—evidencing that all have worsened by the end of the first quarter of 2020. We complement our analysis by tracking the dynamics of the option-adjusted spreads of the EM HY bonds and document that the recovery trends of the credit and liquidity components in bonds spreads have decoupled in the aftermath of the Covid-triggered global meltdown. We evidence relevant differences in bond liquidity between chosen countries, representative of geopolitical regions. All the considered liquidity measures provide a coherent picture of the pandemic impact and allow for insights regarding the recovery from the crisis turmoil and the risk management of the EM HY bond portfolios throughout a systemic crisis.

Keywords: Pandemic crisis; Coronavirus outbreak; Liquidity; Emerging markets; High-yield bonds; Bid–ask spread; Option-adjusted spread (OAS); Relative liquidity score; Round-trip transaction cost; G01; G1; G10; G12; G15; G32 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (8)

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DOI: 10.1057/s41283-021-00074-7

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