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Binary interest rate sensitivities of emerging market corporate bonds
Authors:Mariya Gubareva
Institution:1. ISCAL – Lisbon Accounting and Business School, Instituto Politécnico de Lisboa, Lisbon, Portugal;2. ISEG – Lisbon School of Economics and Management, Universidade de Lisboa, Lisbon, Portugal;3. SOCIUS – Research Centre in Economic and Organizational Sociology, Universidade de Lisboa, Lisbon, Portugal;4. CSG – Research in Social Sciences and Management, Universidade de Lisboa, Lisbon, Portugal
Abstract:We develop a framework to assess interest rate sensitivities of emerging market corporate debt. Our analysis, based on yield indexes, is applied to investment grade and high yield portfolios. We reach beyond correlation-based analyses of interest rate sensitivity and keep our scope centered at capital gains of emerging market corporates and U.S. government bonds portfolios. Our empirical analysis spans over the period 2002–2015. We address interest rate sensitivity of assets during the ignition, apogee, and the aftermath of the global financial crisis. Based on historical data series, we evidence that the emerging market corporate bonds exhibit two different regimes of sensitivity to interest rate changes. We observe switching from a positive sensitivity under the normal market conditions to a negative one during distressed phases of business cycles and provide economical explanations of such phenomena. We show that emerging market corporate bonds, which on average could appear rather insensitive to the interest rate risk, in fact, present binary interest rate sensitivities. This research sheds light on how financial institutions may approach interest rate risk management including the downside risk hedge. Our findings allow banks and financial institutions to optimize economic capital under Basel III regulatory capital rules.
Keywords:Fixed income  portfolio performance evaluation  downside risk management  emerging markets  corporate debt  interest rate sensitivity
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