Long-Term Private Sector External Debt and Equity Returns : Cross-Sectional Evidence from 26 Emerging and Frontier Markets

This study examines the extent to which long-term private sector external debt impacts stock market return across 26 emerging and frontier markets. The results indicate a statistically significant, positive relationship (r = 0.527, p < 0.01) between the average long-term private sector external debt and stock market long-run average return. On average, a $1 billion increase in long-term private sector external debt is associated with 0.048% increase in the stock market long-run average return. Looking at the January returns only, on average, a $1 billion increase in long-term private sector external debt is associated with 0.059% increase in the stock market long-run average return. This study finds no evidence of nonlinear effect of average long-term private sector external debt on stock market long-run average return. The findings imply that higher long-term private sector external debt benefits equity markets in emerging and frontier markets