On the Predictability of Emerging Market Sovereign Credit Spreads
45 Pages Posted: 23 Aug 2015 Last revised: 20 Feb 2020
Date Written: July 30, 2018
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.
Keywords: Sovereign credit spreads; Emerging Markets; Out-of-sample predictability; Term structure; Macroeconomic uncertainty
JEL Classification: F34, G15, G17
Suggested Citation: Suggested Citation