IDEAS home Printed from https://ideas.repec.org/a/cuf/journl/y2018v19i2gubareva.html
   My bibliography  Save this article

Historical Interest Rate Sensitivity of Emerging Market Sovereign Debt: Evidence of Regime Dependent Behavior

Author

Listed:
  • Mariya Gubareva

Abstract

Interest rate sensitivity of USD-denominated emerging market sovereign debt over 1997-2017 is studied through comparative price dynamics of emerging market sovereign bonds versus US governmental securities. The proposed methodology derives important insights for practical strategies of managing interest rate risk in the banking book. We find that the direct positive interest rate sensitivity under normal economic conditions is interchanged with the inverted negative sensitivity during distressed crisis-affected market turbulences. Due to the time-varying behavior of interest rate sensitivity, the hedging of interest rate risk must be a dynamic process linked to phases of the business cycle.

Suggested Citation

  • Mariya Gubareva, 2018. "Historical Interest Rate Sensitivity of Emerging Market Sovereign Debt: Evidence of Regime Dependent Behavior," Annals of Economics and Finance, Society for AEF, vol. 19(2), pages 405-442, November.
    • Handle: RePEc:cuf:journl:y:2018:v:19:i:2:gubareva
    as

    Download full text from publisher

    File URL: http://down.aefweb.net/AefArticles/aef190203Gubareva.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Beutler, Toni & Bichsel, Robert & Bruhin, Adrian & Danton, Jayson, 2020. "The impact of interest rate risk on bank lending," Journal of Banking & Finance, Elsevier, vol. 115(C).
    2. Mariya Gubareva & Maria Rosa Borges, 2018. "Rethinking economic capital management through the integrated derivative-based treatment of interest rate and credit risk," Annals of Operations Research, Springer, vol. 266(1), pages 71-100, July.
    3. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    4. Landschoot, Astrid Van, 2008. "Determinants of yield spread dynamics: Euro versus US dollar corporate bonds," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2597-2605, December.
    5. Takashi Yasuoka, 2017. "Correlations between the Market Price of Interest Rate Risk and Bond Yields," Journal of Reviews on Global Economics, Lifescience Global, vol. 6, pages 208-217.
    6. Wolfgang Aussenegg & Lukas Götz & Ranko Jelic, 2016. "European asset swap spreads and the credit crisis," The European Journal of Finance, Taylor & Francis Journals, vol. 22(7), pages 572-600, May.
    7. Monika Piazzesi & Martin Schneider, 2010. "Interest Rate Risk in Credit Markets," American Economic Review, American Economic Association, vol. 100(2), pages 579-584, May.
    8. Jens Hilscher & Yves Nosbusch, 2010. "Determinants of Sovereign Risk: Macroeconomic Fundamentals and the Pricing of Sovereign Debt," Review of Finance, European Finance Association, vol. 14(2), pages 235-262.
    9. Michael D. Bauer & James D. Hamilton, 2018. "Robust Bond Risk Premia," The Review of Financial Studies, Society for Financial Studies, vol. 31(2), pages 399-448.
    10. Davies, Andrew, 2008. "Credit spread determinants: An 85 year perspective," Journal of Financial Markets, Elsevier, vol. 11(2), pages 180-197, May.
    11. Jeanneret, Alexandre, 2015. "The Dynamics of Sovereign Credit Risk," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 50(5), pages 963-985, October.
    12. Jermann, Urban J. & Yue, Vivian Z., 2018. "Interest rate swaps and corporate default," Journal of Economic Dynamics and Control, Elsevier, vol. 88(C), pages 104-120.
    13. Pascal François & Georges Hübner & Jean-Roch Sibille, 2011. "A Structural Balance Sheet Model of Sovereign Credit Risk," Finance, Presses universitaires de Grenoble, vol. 32(2), pages 137-165.
    14. Kyal Berends & Robert McMenamin & Thanases Plestis & Richard J. Rosen, 2013. "The sensitivity of life insurance firms to interest rate changes," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 37(Q II), pages 47-78.
    15. Ren-Raw Chen & Xiaolin Cheng & Liuren Wu, 2013. "Dynamic Interactions Between Interest-Rate and Credit Risk: Theory and Evidence on the Credit Default Swap Term Structure-super-," Review of Finance, European Finance Association, vol. 17(1), pages 403-441.
    16. Manzoni, Katiuscia, 2002. "Modeling credit spreads: An application to the sterling Eurobond market," International Review of Financial Analysis, Elsevier, vol. 11(2), pages 183-218.
    17. Mariya Gubareva & Maria Rosa Borges, 2017. "Interest rate, liquidity, and sovereign risk: derivative-based VaR," Journal of Risk Finance, Emerald Group Publishing Limited, vol. 18(4), pages 443-465, August.
    18. Mariya Gubareva & Maria Rosa Borges, 2016. "Typology for flight-to-quality episodes and downside risk measurement," Applied Economics, Taylor & Francis Journals, vol. 48(10), pages 835-853, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Mariya Gubareva & Benjamin Keddad, 2022. "Emerging markets financial sector debt: A Markov‐switching study of interest rate sensitivity," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(4), pages 3851-3863, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gubareva, Mariya & Borges, Maria Rosa, 2020. "Switching interest rate sensitivity regimes of U.S. Corporates," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    2. Mariya Gubareva & Maria Rosa Borges, 2022. "Governed by the cycle: interest rate sensitivity of emerging market corporate debt," Annals of Operations Research, Springer, vol. 313(2), pages 991-1019, June.
    3. Mariya Gubareva & Benjamin Keddad, 2022. "Emerging markets financial sector debt: A Markov‐switching study of interest rate sensitivity," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(4), pages 3851-3863, October.
    4. Mariya Gubareva & Maria Rosa Borges, 2018. "Rethinking economic capital management through the integrated derivative-based treatment of interest rate and credit risk," Annals of Operations Research, Springer, vol. 266(1), pages 71-100, July.
    5. Kalimipalli, Madhu & Nayak, Subhankar & Perez, M. Fabricio, 2013. "Dynamic effects of idiosyncratic volatility and liquidity on corporate bond spreads," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2969-2990.
    6. Mäkinen, Taneli & Sarno, Lucio & Zinna, Gabriele, 2020. "Risky bank guarantees," Journal of Financial Economics, Elsevier, vol. 136(2), pages 490-522.
    7. Augustin, Patrick & Subrahmanyam, Marti G. & Tang, Dragon Yongjun & Wang, Sarah Qian, 2014. "Credit Default Swaps: A Survey," Foundations and Trends(R) in Finance, now publishers, vol. 9(1-2), pages 1-196, December.
    8. Mohamed Ben Alaya & Ahmed Kebaier & Djibril Sarr, 2024. "Credit Spreads' Term Structure: Stochastic Modeling with CIR++ Intensity," Papers 2409.09179, arXiv.org.
    9. Li, Xiao-Lin & Li, Xin & Si, Deng-Kui, 2020. "Asymmetric determinants of corporate bond credit spreads in China: Evidence from a nonlinear ARDL model," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    10. Bhanu Pratap Singh Thakur & M. Kannadhasan & Vinay Goyal, 2018. "Determinants of corporate credit spread: evidence from India," DECISION: Official Journal of the Indian Institute of Management Calcutta, Springer;Indian Institute of Management Calcutta, vol. 45(1), pages 59-73, March.
    11. Andreas Rathgeber & David Rudolph & Stefan Stöckl, 2015. "Pricing anomaly at the first sight: same borrower in different currencies faces different credit spreads—an explanation by means of a quanto option," Review of Derivatives Research, Springer, vol. 18(2), pages 107-143, July.
    12. Kinateder, Harald & Wagner, Niklas, 2017. "Quantitative easing and the pricing of EMU sovereign debt," The Quarterly Review of Economics and Finance, Elsevier, vol. 66(C), pages 1-12.
    13. Stellner, Christoph & Klein, Christian & Zwergel, Bernhard, 2015. "Corporate social responsibility and Eurozone corporate bonds: The moderating role of country sustainability," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 538-549.
    14. Maria Mansanet-Bataller & Julien Chevallier & Morgan Hervé-Mignucci & Emilie Alberola, 2010. "The EUA-sCER Spread: Compliance Strategies and Arbitrage in the European Carbon Market," Post-Print halshs-00458991, HAL.
    15. Fong, Tom Pak Wing & Li, Ka-Fai & Fu, John, 2018. "Accounting for sovereign tail risk in emerging economies: The role of global and domestic risk factors," Emerging Markets Review, Elsevier, vol. 34(C), pages 98-110.
    16. Asia Aman, 2019. "Are CDS Spreads Sensitive to the Term Structure of the Yield Curve? A Sector-Wise Analysis under Various Market Conditions," JRFM, MDPI, vol. 12(4), pages 1-13, September.
    17. Riedel, Christoph & Thuraisamy, Kannan S. & Wagner, Niklas, 2013. "Credit cycle dependent spread determinants in emerging sovereign debt markets," Emerging Markets Review, Elsevier, vol. 17(C), pages 209-223.
    18. Batten, Jonathan & Hogan, Warren, 2002. "A perspective on credit derivatives," International Review of Financial Analysis, Elsevier, vol. 11(3), pages 251-278.
    19. Clark, Ephraim & Kassimatis, Konstantinos, 2015. "Macroeconomic effects on emerging-markets sovereign credit spreads," Journal of Financial Stability, Elsevier, vol. 20(C), pages 1-13.
    20. Daniel Jubinski & Amy F. Lipton, 2012. "Equity volatility, bond yields, and yield spreads," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 32(5), pages 480-503, May.

    More about this item

    Keywords

    Fixed Income; Portfolio Performance Evaluation; Downside Risk Management; Emerging Markets; Sovereign Debt; Interest Rate Sensitivity; Capital Gains;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cuf:journl:y:2018:v:19:i:2:gubareva. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Qiang Gao (email available below). General contact details of provider: https://edirc.repec.org/data/emcufcn.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.