Non-default Component of Sovereign Emerging Market Yield Spreads and its Determinants: Evidence from Credit Default Swap Market

Uğur Kücük ()

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Emerging Market Sovereign Bonds; Credit Risk; Credit Default Swaps; Basis; Liquidity; Emerging Market Equity Markets (search for similar items in EconPapers)
JEL-codes: G0 G10 G12 G15 (search for similar items in EconPapers)
Date: 2010-05-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Published in The Journal of Fixed Income Spring 2010.19(2010): pp. 44-66

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