A Free Lunch for Emerging Markets: Removing International Financial Market Imperfections with Modern Finance Instruments

33 Pages Posted: 24 Jul 2007

See all articles by Bernhard Herz

Bernhard Herz

University of Bayreuth

Christian Bauer

University of Trier; Universität Trier

Stefan Hoops

Lehman Brothers International, Europe

Date Written: November 2006

Abstract

Regulations and frictions of the market for emerging market bonds keep up the price of capital demanded by emerging countries. Instruments of modern finance, i.e. a pool of emerging market bonds refinanced via an enhanced Asset Backed Securities structure, can significantly reduce the interest payments. In an extensive simulation study based on empirical data, the cumulated interest savings for a horizon of 10 years amount to up to 44% of the credit sum. The theoretical structure of the transaction is explicitly derived in cooperation with professionals from major commercial banks and thus realistic. The implementation is costless and does neither require institutional reforms nor debt forgiveness and is in line with market forces.

Keywords: emerging markets, financial market imperfections, finance instruments, debt crises, asset backed securities (ABS)

JEL Classification: H63, F34, G

Suggested Citation

Herz, Bernhard and Bauer, Christian and Hoops, Stefan, A Free Lunch for Emerging Markets: Removing International Financial Market Imperfections with Modern Finance Instruments (November 2006). Available at SSRN: https://ssrn.com/abstract=1002587 or http://dx.doi.org/10.2139/ssrn.1002587

Bernhard Herz (Contact Author)

University of Bayreuth ( email )

Universitatsstr 30
Bayreuth, D-95447
Germany

Christian Bauer

University of Trier ( email )

15, Universitaetsring
Trier, 54286
Germany

Universität Trier ( email )

Germany

Stefan Hoops

Lehman Brothers International, Europe ( email )

25 Bank Street
30th Floor
London E14 5LE
United Kingdom

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