همبستگی در بازارهای نوظهور اوراق قرضه: نقش عوامل محلی و جهانی

This paper empirically assesses co-movements in emerging market bond returns and disentangles the roles of external and domestic factors during episodes of heightened market volatility. The conceptual framework, set in the context of asset allocation, allows us to describe the channels through which shocks originating in a particular emerging or mature market are transmitted across countries and markets. We show that a simple measure of cross-country correlations, when presented together with the more commonly used average correlation coefficient, can be more informative during episodes of heightened market volatility. Data for the period 1997–2008 are analysed for evidence of true contagion and common external shocks.

Emerging markets have been marked by several well-documented episodes of volatility spillovers and contagion. The Tequila crisis of 1994–95, the Asian crisis of 1997, the Russian default and the collapse of LTCM in 1998, the market reaction after the September 11 terrorist attacks, the run-up to the Argentine debt default in late 2001, the US high yield market sell off of 2002, or most recently the US sub-prime market-related volatility of summer 2007 and the collapse of Lehman Brothers in mid-September 2008, are prominent examples of market events accompanied by the transmission of financial market volatility across borders. Other than foreign direct investment, emerging market (EM) bonds have historically been the largest source of financing to emerging markets since the beginning of the 1990s. International bonds have, however, been a volatile source of financing, vulnerable to external shocks and abrupt shifts in market sentiment. Volatility in secondary markets has usually been associated with diminished appetite for primary market issuance (see, for example, IMF Emerging Markets Financing, November 2001) and often associated with capital outflows and foreign exchange market pressures. This paper is an empirical investigation of the co-movement of emerging market bond returns of the EMBI Global benchmark index's key constituent countries over the period 1997–2008. Our aim is to assess the respective roles of common external factors in explaining co-movements in emerging markets bond returns on the basis of a conceptual framework that allows, on the one hand, to identify the potential sources of contagion in emerging bond markets (EMs) and on the other hand, to describe the mechanisms through which shocks originating in a particular emerging or mature market are transmitted across countries and markets. In this respect, the paper could be viewed as a contribution to a better understanding of the mechanisms through which shocks are transmitted across countries and markets, and to the understanding of which episodes over the past decade represent true contagion. Moreover, it proposes a simple measure of adjusted cross-country correlations, that presented together with the more commonly used average correlation coefficient, can warn about specific or common risks to EM valuations. The sharp spikes in volatility of emerging market bond prices and returns are often captured by increased cross-country market correlations in the now vast literature on contagion. In fact, correlation analysis represents one of the major strategies to measure the cross-country transmission of shocks.1 However, in the wake of the Asian crisis, the inference of contagion drawn from increased cross-country correlation coefficients has been challenged by Ronn (1998) and Forbes and Rigobon, 2001 and Forbes and Rigobon, 2002. These authors show that the presence of simultaneity, omitted variables or heteroskedasticity in the data may cause correlation coefficients be biased upward during periods of market turmoil. This may alter the interpretation of traditional correlation coefficients, leading to erroneously interpret market “interdependence” for contagion. Nonetheless, under certain hypotheses, it is possible to adjust these coefficients to eliminate the bias. However, the effectiveness of the correction in the presence of common shocks has also been questioned in subsequent studies (see, for instance, Corsetti et al., 2005). Other important studies have argued that the rise in the correlation coefficients is driven entirely by an increase in underlying volatility. This has led to the investigation of volatility spillovers across markets—King and Wadhani, 1990, Chou et al., 1994, Lin et al., 1994, Edwards, 1998 and Park and Song, 1999. However, more recently, Yoon (2005) noted that contagion may be due to factors other than increased volatility and that the direction of the bias implicit in correlation coefficients depends strongly upon the underlying data-generating process.2 Aside from these technical shortcomings, another objection could be raised with respect to the use of correlation coefficients to gauge contagion, in terms of the role of “third factors”, particularly global financial factors, in driving market co-movements. In order to address some of the shortcomings of the use of unadjusted aggregate correlation coefficients, in this paper we appeal to a more restrictive definition of contagion viewed as excess co-movement, that is, the transmission of shocks from one market or country to others, unexplained either by common shocks or by fundamental links among the countries. Using an asset allocation decision as the backdrop, and a choice between emerging market bonds, a mature market asset of similar risk profile (high yield mature market corporate bonds), a safe asset (US treasury securities) and an alternative asset class (mature market equities), we adopt a three-factor model of emerging market bond (EM) returns, to address the question of whether the increases in the emerging markets co-movement usually associated with crisis episodes are attributable to common shocks or to “pure” contagion. More precisely, our analysis is based on the average correlations of each country's returns with the rest of the EMBI Global sample, adjusted for the presence of common external factors (for our purposes, U.S. Treasury bonds, U.S. high yield market returns and equity market returns). The correlation coefficients of residuals can thus be viewed as a measure of “excess co-movement” or “true contagion” that is the part of the co-movement unexplained by common external shocks. The alternative measure we propose in this paper better differentiates episodes of true contagion from reaction to common external factors. Excess-co-movement, free from the influence of “third factors”, was first quantified by Pindyck and Rotemberg, 1990 and Pindyck and Rotemberg, 1993 and used as a measure of contagion in mature markets. After taking into account common fundamentals, they showed that there is a residual co-movement across stocks from very different industries and idiosyncratic fundamentals. However, little is known with regard to emerging markets as far as the residual co-movement is concerned. For instance, in the case of the exchange rate variation, Masson (1999) identifies three components, namely: “monsoonal” or common shocks simultaneously affecting all countries, spillovers occurring through trade and other macroeconomic linkages, and a residual, that is the component unexplained by the previous systematic relations and referred to as “contagion”. Valdés (1997) uses secondary market debt prices as well as country credit ratings and shows that fundamentals are unable to explain the cross-country co-movement of creditworthiness among Latin American countries. Baig and Goldfajn (1998) test for evidence of contagion across East Asian financial markets. In order to account for the residual comovement, they control for own country and cross border news and other fundamentals and show evidence of cross-border contagion in the currency and equity markets. Bekaert et al. (2005) propose a two-factor model (US equity market returns and a regional equity portfolio return) with time-varying betas and apply it to stock markets in Europe, South-East Asia and Latin America during the Tequila and Asian crises of the 1990s. They find little evidence of additional contagion, defined as excess correlation of the idiosyncratic residuals in the case of the Mexican crisis but a significant increase in residual correlation during the Asian crisis. Regarding the interpretation of the excess co-movement, the literature attributes this residual co-movement either to multiple equilibria (sunspots) or to market behaviour. Jeanne (1997) and Jeanne and Masson (2000) develop a Markov-switching model and apply it to the ERM crisis. In their view, discontinuities in the shock transmission process are associated with jumps between multiple equilibria in the currency market. As for the market-based interpretation of contagion–to which our paper is related–there are mainly three strands of the literature. According to one, contagion can be captured by shifts in market investors' perceptions and attitudes towards risk (Kumar and Persaud, 2001 and Chakravorti and Lall, 2004). The second strand of the literature portrays contagion as the result of investors' herding behaviour (Lakonishok et al., 1992, Christie and Huang, 1995, Kim and Wei, 2002 and Choe et al., 1999). Finally, according to the third view, contagion is the result of “wake-up calls” by investors (Goldstein, 1998, Baig and Goldfajn, 1999 and Kaminsky and Schmukler, 1999). The remainder of the paper is organized as follows. Section 2 proposes a conceptual framework for the analysis of “pure” contagion in emerging bond markets based on aggregate correlations. In Section 3 we present the main methodological issues and describe the data. In Section 4, we provide an application of our framework to the episodes of market turmoil affecting EMs over the period 1997–2008. Section 5 concludes.

The objective of the present paper is to assess the respective part of common external factors and market behaviour in explaining co-movements in emerging bond returns. We propose a conceptual framework based on the evolution of EM spreads and aggregate correlations in order to characterize investors' attitudes towards risk in EM, highlight the potential sources of risks to the EM class and distinguish between external and country specific driven co-movement. Our analysis covers 18 out of 33 emerging countries initially included in the EMBI Global over the period March 1997 to end October 2008. In order to disentangle the roles of common external and idiosyncratic factors in explaining bond markets co-movement, we perform 60-day rolling regressions of initial emerging bond returns against three external factors (US-TB, SPX and HY Indexes). The correlation coefficients of residuals thus become a measure of the excess-co-movement of emerging bond markets, the co-movement unexplained by common external factors and generally attributed to market behaviour. We find evidence of pure contagion (excess co-movement) in the case of the Hong-Kong market crash of October 1997, the Russian crisis and the collapse of LTCM collapse in 1998 and Argentinean crisis of 2001. We also find that adjusted correlations, as measure of “pure contagion”, systematically decline from 1997 through mid-September 2008 (Fig. 2 in Section 4.1). At the same time, the widening gap between adjusted and unadjusted average correlations from 2003 until the financial crisis deepening during fall 2008, suggests that the comovement of EMs returns appears to be less specific to particular EMs, driven more by external events, and that “pure” contagion during this period was very low. Moreover, the dramatic decline in spreads of emerging markets can be attributed to a large extent to improving country fundamentals across the range of emerging market countries over this period. This leads us to conclude that over the past few years and until the recent events of the fall 2008, investors seemed to have better differentiated between individual emerging countries, as confirmed by decreasing and very low average correlations and spreads, although some pairwise correlations have remained high, even during the recent period. This suggests that the distribution of bond returns is not unimodal and that there are underlying groups characterized by high within-group comovement. The opposite evolution of the underlying groups during periods of turbulence in financial markets could then explain the very low levels recently reached by the aggregate average correlations. The extended period of low correlations appears to have ended in September 2008, coinciding with the financial turbulence associated with the collapse of Lehman Brothers. Both unadjusted–and subsequently adjusted–correlations rose sharply in the aftermath, indicating that the common global shock explained much of the rise in emerging market bond volatility, and that investors' discrimination across emerging markets diminished in the period around late October 2008. Nonetheless, average correlations method may not be useful in summarizing market outcomes if the underlying distribution of bond returns is not unimodal. In an extension to this framework, we have used several methods on a year-to-year basis in order to identify periods where the “two-tier paradigm” of emerging markets prevails and found evidence of increased market tiering from 2003 to 2005 (Bunda et al., 2005). The “core” group (of high variance) driving the main part of the co-movement is made mainly of sub-investment grade bonds whereas the low variance group is composed of bonds rated as investment grade.