Emerging Market Sovereign Credit Spreads: In-Sample and Out-of-Sample Predictability
45 Pages Posted: 23 Aug 2015 Last revised: 10 Nov 2016
Date Written: November 8, 2016
This paper investigates the quarter-ahead predictability of Brazil, Mexico, Philippines and Turkey credit spreads for short and long maturity bonds during two separate periods preceding and following the Lehman Brothers' default. A model based on the current country-specific credit spread curve predicts no better than the random walk and slope regression benchmarks. Extensions with the global yield curve factors and short-term interest rate volatility notably outperform the benchmark models post-Lehman. Our findings suggest that uncertainty indicators, both global and domestic, contain information about future credit spreads and that bond prices did better align with fundamentals post-crisis.
Keywords: Sovereign bonds, Credit spreads, Term structure, Emerging markets, Macroeconomic volatility, Out-of-sample predictability, Forecast encompassing
JEL Classification: F34, G15, G17
Suggested Citation: Suggested Citation