Predictability in Emerging Sovereign Debt Markets

51 Pages Posted: 11 Jul 2001

See all articles by Gergana Jostova

Gergana Jostova

George Washington University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: October 28, 2003


This paper finds strong evidence of predictability in Brady bonds, the most liquid emerging debt market, by implementing a new model for credit spreads. Predictability is economically and statistically significant and robust to various considerations. Active management provides US investors in emerging markets with double the buy-and-hold returns at lower risk and the equivalent of free options on Brady bonds. Our analysis suggests that predictability is primarily driven by credit spread deviations from fundamentals, rather than time-varying risk or risk premia. We believe this inefficiency is the result of the restrictions of a non-transparent, institutionally dominated, dealer market and the lack of a well developed derivatives market for emerging country credit risk.

Keywords: Predictability, credit risk, credit spreads, emerging debt markets, Brady bonds, efficiency

JEL Classification: G11, G12, G14, G15

Suggested Citation

Jostova, Gergana, Predictability in Emerging Sovereign Debt Markets (October 28, 2003). Available at SSRN: or

Gergana Jostova (Contact Author)

George Washington University - Department of Finance ( email )

2201 G St NW
Funger Hall, Suite 501
Washington, DC 20052
United States
202-994-7478 (Phone)


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