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RFS Advance Access originally published online on March 14, 2008
Review of Financial Studies 2008 21(5):1983-2014; doi:10.1093/rfs/hhn015
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© The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

Do Sovereign Bonds Benefit Corporate Bonds in Emerging Markets?

Robert F. Dittmar and Kathy Yuan
Stephen M. Ross School of Business, University of Michigan

Address correspondence to: Kathy Yuan, Stephen M. Ross School of Business, University of Michigan, 701 Tappan Street, Ann Arbor, MI 48109; Tel: 7347636039; Fax: 7349368715; e-mail: kyuan{at}umich.edu.

JEL Classification: G10, G12, G14


  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.

We thank Drausio Giacomelli and Jesse Yan at JPMorgan-Chase, and David Li at Integrated Finance Limited, for help with the data, as well as the editor, Cam Harvey, two anonymous referees, Jeremy Stein, Stew Myers, Sendhil Mullainathan, Tyler Shumway, David Brophy, Alfonso Dufour, and the seminar participants at Massachusetts Institute of Technology, University of Michigan, the NBER 2001 Summer Institute, the 2002 AFA annual conference, the 2002 Utah Winter Finance Conference, the 2006 MTS Conference on Financial Markets, the International Monetary Fund, and JP Morgan-Chase Emerging Market Bond Trading Desk for helpful discussions; and Qin Lei for research assistance. A previous version of this paper was circulated under the title "The Pricing Impact of Sovereign Bonds." The usual disclaimer applies.


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