The Geography of Risk Capital
60 Pages Posted: 4 Apr 2013 Last revised: 9 Jul 2014
Date Written: July 1, 2014
We use the relative pricing of pairs of emerging market (EM) sovereign bonds issued in both dollars and euros to study capital markets frictions during periods of financial distress. While there is no evidence of mispricing before 2007, during the 2007–2008 crisis we document a persistent anomaly that resulted in segmented EM bond markets. The sign of mispricing varies cross-sectionally, depending on the domestic currency of funding banks, and its magnitude depends on the degree of fragility in wholesale funding markets. Neither liquidity nor short-selling constraints can account for this anomaly. We document the impact of non-conventional policy interventions.
Keywords: Limits to Arbitrage, Market Anomalies, Financial Constraints, Frictions, Wholesale Financing
JEL Classification: G01, G12
Suggested Citation: Suggested Citation