Emerging Market Bond Returns – An Investor Perspective

Johannes Juttner (), David Chung and Wayne Leung
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Johannes Juttner: Department of Economics, Macquarie University
David Chung: Department of Economics, Macquarie University
Wayne Leung: Department of Economics, Macquarie University

No 406, Research Papers from Macquarie University, Department of Economics

Abstract: The last twenty five years provided international investors in sovereign bonds of emerging market countries with a colourful experience consisting of several defaults that resulted in protracted, frustrating and – most importantly – costly salvage operations. It therefore appears natural to ask how investors have priced sovereign bonds under these challenging conditions. The novel feature of this study consists in applying a conventional multifactor global market model to emerging market sovereign bond index rates of return that are denominated in US dollars and subsequently relating the unexplained residual from the market model’s estimates of each country’s total bond index return to country specific factors. They include political and financial risks as well as other presumed determinants of bond index rates of return. The estimation approach allows us to separate out the common influences of global bond market movements from the country-specific influences that drive rates of return on the outstanding bonds of 19 emerging market countries from Latin America, Transition Economies, Asian and African countries. The results of our study confirm that sovereign countries’ bond index rates of return that include interest payments and capital gains/losses may be explained in terms of conventional bond pricing models by combining global market factors with local risk and other country-specific influences. Unsurprisingly, emerging market bonds appear to be dancing to different tunes than those in developed economies.

Keywords: Emerging bond markets; International investments; Sovereign bonds (search for similar items in EconPapers)
JEL-codes: F21 F30 G15 (search for similar items in EconPapers)
Pages: 31 pages.
Date: 2004-08
New Economics Papers: this item is included in nep-cfn, nep-fin, nep-fmk and nep-sea
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