The Determimants of Corporate Spreads in Emerging Markets : An Option-Adjusted Spreads Analysis

This study explores the determinants of corporate bond spreads in emerging markets economies. Using a largely unexploited dataset, we find that corporate bond spreads are determined by firm-specific variables (i.e., profitability, capitalization, leverage, size and volatility of equity), bond characteristics (i.e., time to maturity), macroeconomic conditions (i.e., GDP growth and GDP per capita), sovereign risk (i.e., EMBI spread), and global factors (i.e., US junk bond yields, Treasury yields and VIX index). A variance decomposition analysis shows that firm-level characteristics account for the larger share of the variance. In addition, we find two asymmetries. The first is in line the sovereign ceiling lite hypothesis which states that the transfer of risk from the sovereign to the private sector is less than 1 to 1. The second is consistent with the popular notion that panics are common in emerging markets where investors are less informed and more prone to herding