Equity Returns, Bond Spreads, and Economic Activity in Emerging Countries

21 Pages Posted: 13 May 2021

See all articles by Jaroslav Horvath

Jaroslav Horvath

University of New Hampshire

Guanyi Yang


Date Written: April 12, 2021


While simultaneously accounting for the effects of sovereign and corporate bond spreads, we document that emerging market economy (EME) equity returns have a strong predictive power for future output growth and account for a significant fraction of output fluctuations in these countries. Our results are based on the environment of Caballero, Fernandez, and Park (2019), who show that corporate bond spreads are a better driver of EME economic activity than sovereign bond spreads. We find that equity returns, a proxy of domestic and external financial conditions, play a more important role for EME output growth than both types of bond spreads. We attribute this difference to the effectiveness of equity returns in transmitting global financial risk shocks to EMEs and to the role of equity issuance in international capital flows in EMEs.

Keywords: equity returns, bond spreads, economic activity, emerging economies

JEL Classification: E32, E37, F34, F37, G15

Suggested Citation

Horvath, Jaroslav and Yang, Guanyi, Equity Returns, Bond Spreads, and Economic Activity in Emerging Countries (April 12, 2021). Available at SSRN: https://ssrn.com/abstract=3844546 or http://dx.doi.org/10.2139/ssrn.3844546

Jaroslav Horvath (Contact Author)

University of New Hampshire ( email )

Department of Economics
10 Garrison Avenue
Durham, NH 03824
United States
6038620867 (Phone)

HOME PAGE: http://https://sites.google.com/site/jaroslavjayhorvath/

Guanyi Yang


14 E. Cache La Poudre St.
Colorado Springs, CO 80903
United States

HOME PAGE: http://https://sites.google.com/site/guanyiyangeconomics/

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