Market convergence, catastrophe risk and sovereign borrowing: An empirical analysis for emerging market countries.
详细信息
文摘
Over the last decade natural catastrophes have increased both in number and severity. The combination of higher event frequency and intensity, coupled with the fragile economies of developing countries, increases the potential damage from natural disasters and pose challenges to sustainable economic development. This dissertation empirically investigates links between natural catastrophes and the cost of sovereign debt in developing countries. It examines evidence supporting the proposition that ex-post borrowing costs are higher than ex-ante costs for developing country governments.;This study first applies an event study methodology to analyze the effects of catastrophes on sovereign bond prices. Next, a cross-sectional analysis investigates the factors that lead to variation in bond returns after the catastrophes. Finally, a piece-wise regression analysis examines longer-term effects of catastrophes on sovereign bond prices.;Our analysis of 211 events in 25 countries over the period of January 1994 through December 2003 reveals that catastrophes have a material impact on the bond returns of the developing country governments. In other words, sovereign bond spreads increase after the catastrophes, thus raising the cost of borrowing for those governments. Furthermore, the results from the piece-wise sovereign spread analysis indicate that these price effects remain for a considerable period of time after the catastrophes.;Examination of the factors that drive the change in observed premiums reveals that the development level of a country, whether a country is disaster-prone or not, and the severity of the catastrophes are most important influencing factors. Higher insurance penetration, contrary to our expectations, does not conform to smaller price movements in the sovereign bond spreads.;Overall, our analysis provides evidence that the information of catastrophes is assimilated by the market in the days following the catastrophes and is reflected in the country bond values as increased credit risk. The consequent higher risk of defaulting on their debt is expected to make it more difficult or more expensive for the developing country governments to raise funds after a major disaster. This evidence, in its simplest form, supports the use of hedging mechanisms for emerging country governments.