Liquidity and Credit Risk in Emerging Debt Markets

45 Pages Posted: 25 Mar 2008

See all articles by John Hund

John Hund

University of Georgia

David A. Lesmond

Tulane University - A.B. Freeman School of Business

Date Written: March 17, 2008


Liquidity risk is an important component of the yield spread on both corporate and sovereign bonds in emerging markets, explaining about half as much of the yield spread as credit risk specific variables. Using three measures of liquidity, including estimates from a model extension of the limited dependent variable model of Lesmond, Ogden, and Trzincka (1999)) on a dataset of over 1600 bond-years spanning both crisis and boom periods in 16 countries, we provide valuable evidence on the magnitude of these effects and the differences in liquidity across sovereign and corporate issuers. In particular, we document that liquidity components increase as credit quality deteriorates for sovereign debt, while the reverse is true for corporate debt, and are the first study to examine the determinants of the rapidly expanding emerging market corporate debt sector. Liquidity is highly significant in explaining cross-sectional variation in yield levels and changes across rated and unrated categories, for both corporate and sovereign issuers, and appears to dominate credit risk in explaining cross-sectional variations in yield spreads for both corporate and sovereign debt instruments across all of the emerging markets examined.

Keywords: liquidity, emerging markets, credit risk, sovereign debt

JEL Classification: F34, G15, E43

Suggested Citation

Hund, John and Lesmond, David A., Liquidity and Credit Risk in Emerging Debt Markets (March 17, 2008). Available at SSRN: or

John Hund (Contact Author)

University of Georgia ( email )

Athens, GA 30602
United States

David A. Lesmond

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
511 Goldring-Woldenberg Hall
New Orleans, LA 70118
United States
504-865-5665 (Phone)
504-865-6751 (Fax)

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