Abstract
One of the most notable empirical puzzles in pricing sovereign credit risk concerns the observed differences in credit spreads between emerging market (EM) sovereigns and identically rated G7 corporate borrowers. These differences can be seen on two axes: rating and maturity. For example, holding maturity constant at 5 years, Cantor and Packer (1996), economists at the Federal Reserve Bank of New York, observed that sovereign debt issues from emerging markets with ratings below “A” were priced at consistently higher spreads relative to U.S. Treasuries than identically rated G7 corporate issuers. In contrast, spreads for sovereigns rated above “A” were equal or lower than comparable corporate debt. An example of this general finding is shown in Figure 1.
This is a preview of subscription content, log in via an institution.
Buying options
Tax calculation will be finalised at checkout
Purchases are for personal use only
Learn about institutional subscriptionsPreview
Unable to display preview. Download preview PDF.
References
Black, F., and J. Cox, 1976, “Valuing Corporate Securities: Some Effects of Bond Indenture Provisions,” Journal of Finance, 31, 351–367.
Black, F., and M. Scholes, 1973, “The Pricing of Options and Corporate Liabilities,” Journal of Political Economy, 83, 3, 637–654.
Boehmer, E., and W.L. Megginson, 1990, “Determinants of Secondary Market Prices for Developing Country Syndicated Loans,” Journal of Finance, 45, 1517–1540.
Cantor, R., and F. Packer, 1996, “Determinants and Impact of Sovereign Credit Ratings,” Economic Policy Review, Federal Reserve Bank of New York, 2, 37–53.
Claessens, S., and G. Pennacchi, 1996, “Estimating the Likelihood of Mexican Default from the Market Prices of Brady Bonds”, Journal of Financial and Quantitative Analysis, 31, 109–126.
Cumby, R., and M.D.D. Evans, 1995, “The Term Structure of Credit Risk: Estimates and Specification Tests,” Working Paper S-95-21, NYU Salomon Center.
Ederington, L.H., and J.B. Yawitz, 1987, “The Bond Rating Process,” in E. Altman, ed., Handbook of Financial Markets and Institutions, 6th ed., New York, Wiley.
Edwards, S., 1986, “The Pricing of Bonds and Bank Loans in International Markets,” European Economic Review, 30, 565–589.
Fisher, L., 1959, “Determinants of Risk Premiums on Corporate Bonds,” Journal of Political Economy, 67, 3, 217–237.
Guidotti, P.E., and M.S. Kumar, 1991, “Domestic Public Debt of Externally Indebted Countries,” International Monetary Fund, Occasional Paper 80.
Hull, John. C. Options, futures, and other derivatives, Prentice-Hall, Saddle River, NJ, 1993.
Jones, E.P., S.P. Mason, and E. Rosenfeld, 1984, “Contingent Claims Analysis of Corporate Capital Structures: an Empirical Investigation,” Journal of Finance, 39, 611–627.
Longstaff, F., and E. Schwartz, 1995, “A Simple Approach to Valuing Risky Fixed and Floating Rate Debt” Journal of Finance, 50, 789–819.
Merton, R.C., 1974, “On the Pricing of Corporate Debt: The Risk Structure of Interest Rates,” Journal of Finance, 29, 449–470.
Sarig, O., and A.Warga, 1989, “Some Empirical Estimates of the Risk Structure of Interest Rates,” Journal of Finance, 44, 1351–1360.
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2001 Springer Science+Business Media New York
About this chapter
Cite this chapter
Morris, A.C. (2001). The Bi-Currency Balance Sheet Model of Latent Currency Risk. In: Figlewski, S., Levich, R.M. (eds) Risk Management: The State of the Art. The New York University Salomon Center Series on Financial Markets and Institutions, vol 8. Springer, Boston, MA. https://doi.org/10.1007/978-1-4615-0791-8_12
Download citation
DOI: https://doi.org/10.1007/978-1-4615-0791-8_12
Publisher Name: Springer, Boston, MA
Print ISBN: 978-1-4613-5241-9
Online ISBN: 978-1-4615-0791-8
eBook Packages: Springer Book Archive