Emerging Market Sovereign Credit Spreads: In-Sample and Out-of-Sample Predictability

Audzeyeva, Alena; Fuertes, Ana-Maria

Abstract

This paper investigates the quarter-ahead predictability of Brazil, Mexico, Philippines and Turkey credit spreads for short and long maturity bonds during two separate periods preceding and following the Lehman Brothers' default. A model based on the current country-specific credit spread curve predicts no better than the random walk and slope regression benchmarks. Extensions with the global yield curve factors and short-term interest rate volatility notably outperform the benchmark models post-Lehman. Our findings suggest that uncertainty indicators, both global and domestic, contain information about future credit spreads and that bond prices did better align with fundamentals post-crisis.

Citation

Audzeyeva, A., & Fuertes, A. (2015). Emerging Market Sovereign Credit Spreads: In-Sample and Out-of-Sample Predictability. https://doi.org/10.2139/ssrn.2649216

• Acceptance Date: Aug 25, 2015
• Publication Date: Aug 25, 2015
• Journal: SSRN
• Series Title: European Financial Management Annual (EFMA) meeting 2017
• DOI: https://doi.org/10.2139/ssrn.2649216
• Keywords: Sovereign credit spreads; Emerging Markets; Out-of-sample predictability; Term structure; Macroeconomic uncertainty.
• Publisher URL: http://dx.doi.org/10.2139/ssrn.2649216