Emerging Market Bond Spreads and Sovereign Credit Ratings: Reconciling Market Views with Economic Fundamentals
IMF Working Papers, October 1, 2001
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- Emerging Market Bond Spreads and Sovereign Credit Ratings: Reconciling Market Views with Economic Fundamentals
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Bibliographic details
- Authors: Amadou N Sy
- Published: October 1, 2001
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451858051.001
Summary and objective
- Uses a panel data estimation of a simple univariate model of sovereign spreads on ratings to analyze statistically significant deviations from the estimated relationship.
- Documents evidence of an asymmetric adjustment of spreads and ratings when such deviations are significant.
- Illustrates how significant disagreements between market and rating agencies' views can be used as a signal that further technical and sovereign analysis is warranted.
Methodology
- Panel data estimation of a simple univariate model relating sovereign spreads to sovereign credit ratings.
- Statistical analysis focuses on identifying and characterizing significant deviations from the estimated spreads–ratings relationship.
- Investigation of adjustment dynamics when market spreads and ratings diverge, with attention to asymmetries in those adjustments.
Key findings
- Evidence of an asymmetric adjustment of spreads and ratings when deviations between market spreads and ratings are statistically significant.
- Significant disagreements between market views and rating agencies can serve as a signal for further technical and sovereign analysis.
- Historical patterns identified:
- Spreads were "excessively low" for most emerging markets before the Asian crisis.
- More recently, spreads were "excessively high" for a number of emerging markets.
Policy implications and recommended use of results
- Use divergences between market spreads and sovereign credit ratings as a trigger for more detailed analysis of sovereign risk and technical fundamentals.
- Monitor asymmetric adjustment dynamics to better time or interpret rating actions and market movements.
- Consider market–rating disagreements as complementary information to rating agency assessments when forming sovereign risk judgments.
Subjects and keywords
- Subjects: Bonds, Credit ratings, Emerging and frontier financial markets, Financial institutions, Financial markets, Financial services, Money, Securities markets, Yield curve
- Keywords: Africa, Bond spreads, Bonds, credit rating, credit ratings, Emerging and frontier financial markets, emerging market, emerging market bond, Global, market, market participant, monitoring, rating, rating adjustment, rating agency, rating downgrade, rating upgrade, risk appetite, Securities markets, sovereign risk, sovereign spread, WP, Yield curve