Understanding Emerging Market Bonds

Abstract

Although emerging market bonds have been a investment option for centuries, only in the last decade have we had the data to begin to study their behavior. According to this data emerging market bonds have had high volatility, negative skewness and low, but increasing, correlation with existing asset classes. Not surprisingly we find that as with other asset classes, country risk plays an important role in the pricing of emerging market bonds. We also introduce a measure of market sentiment for emerging market bonds. For many investors the extreme characteristics of emerging market bonds will make it difficult for them to invest, for others we provide some insight on means for emerging market bond investments.