In Search of Distress Risk in Emerging Markets
This paper employs a novel multi-country dataset of corporate defaults to develop a model of distress risk specific to emerging markets. The data suggest that global financial variables such as US interest rates and shifts in global liquidity and risk aversion have significant predictive power for forecasting corporate distress risk in emerging markets. We document a positive distress risk premium in emerging market equities and show that the impact of a global "risk-off" environment on default risk is greater for firms whose returns are more sensitive to a composite global factor.
We thank Guido Lorenzoni, Lillian Cheung, Matthew Yiu, Giorgio Valente, Duan Jin-Chuan and seminar participants at the HKIMR, the Federal Reserve Board, the IMF’s Summer Research Conference (Santiago, Chile), and UNC-Chapel Hill for thoughtful comments and suggestions. Special thanks are due to Steve Cecchetti, Eric Ghysels, Peter Hansen, Christian Lundblad and Mike Aguilar. This paper was written under the auspices of the Thematic Fellowship at the Hong Kong Monetary Authority. This research was in part also supported by a NUS-RMI-CRI grant and partially conducted during a visit by Asis to RMI.We thank Sun Wei, Zhifeng Zhang and the team at RMI-CRI for their efforts. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.