Skip to main content

Research Repository

Advanced Search

On the Prediction of Emerging Market Sovereign Credit Spreads

Audzeyeva, Alena; Fuertes, Ana-Maria

Authors

Ana-Maria Fuertes



Abstract

This paper examines the quarter-ahead out-of-sample predictability of Brazil, Mexico, the Philippines and Turkey credit spreads before and after the Lehman Brothers' default. A model based on the country-specific credit spread curve factors predicts no better than the random walk and slope regression benchmarks. Model extensions with the global yield curve factors and with both global and domestic uncertainty indicators notably outperform both benchmarks post-Lehman. The finding that bond prices better reflect fundamental information after the Lehman Brothers' failure indicates that this landmark of the recent global financial crisis had wake-up call effects on emerging market bond investors.

Acceptance Date Oct 7, 2015
Publication Date Oct 7, 2015
Journal SSRN
DOI https://doi.org/10.2139/ssrn.2649216
Keywords Sovereign bonds, Credit spreads, Term structure, Emerging markets, Macroeconomic volatility, Out-of-sample predictability, Forecast encompassing
Publisher URL https://doi.org/10.2139/ssrn.2649216