Do Sovereign Bonds Benefit Corporate Bonds in Emerging Markets?

Posted: 19 Sep 2008

See all articles by Robert F. Dittmar

Robert F. Dittmar

University of Michigan, Stephen M. Ross School of Business

Kathy Yuan

London School of Economics & Political Science (LSE) - Department of Finance

Date Written: September 2008

Abstract

We analyze the impact of emerging-market sovereign bonds on emerging-market corporate bonds by examining their spanning enhancement, price discovery, and issuance effects. We find that the effect of spanning enhancement is positive and large; over one-fifth of the information in corporate yield spreads is traced to innovations in sovereign bonds; and most of these effects are due to discovery and spanning of systematic risks. Further, issuance of sovereign bonds, controlling for endogeneity of market-timing decisions, lowers corporate yield and bid-ask spreads. Our results indicate that sovereign securities act as benchmarks and suggest they promote a vibrant corporate bond market.

Keywords: G10, G12, G14

Suggested Citation

Dittmar, Robert F. and Yuan, Kathy Zhichao, Do Sovereign Bonds Benefit Corporate Bonds in Emerging Markets? (September 2008). The Review of Financial Studies, Vol. 21, Issue 5, pp. 1983-2014, 2008, Available at SSRN: https://ssrn.com/abstract=1270461 or http://dx.doi.org/hhn015

Robert F. Dittmar (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Kathy Zhichao Yuan

London School of Economics & Political Science (LSE) - Department of Finance ( email )

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London, London WC2A 2AE
United Kingdom
+44 (0)20 7955 6407 (Phone)
+44 (0)20 7849 4647 (Fax)

HOME PAGE: http://fmg.lse.ac.uk/~kathy

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