The Pricing Impacts of Sovereign Bonds

Abstract

In this paper, we analyze the pricing impact of emerging market sovereign bonds on corresponding corporate bonds by examining the spanning enhancement, price discovery, and issuance effects of sovereign bonds. Our evidence suggests that, for relatively undeveloped markets, that is those with few or no sovereign bonds outstanding, the effect of spanning enhancement is positive and large. For more developed markets, that is those with several sovereign bonds already outstanding, the presence of sovereign bonds contributes significantly to price discovery in the corporate bond market. Most of these effects are due to discovery and spanning of systematic risks. In addition, we find that issuance of new sovereign bonds, controlling for the endogeneity of market timing decisions, lowers yield spreads and bid-ask spreads of existing corporate bonds. Our results indicate the benchmark status of sovereign securities and suggest they are essential for developing a vibrant corporate bond markets for emerging economies.

Keywords: Liquidity, benchmark, sovereign bond, corporate bond, emerging market

JEL Classification: G12