Bond valuation in emerging markets

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Sovereign and corporate bonds from emerging markets have gained significance as a distinct asset class in international finance over the last 20 years, driven by the need for external financing and investors' search for new opportunities with favorable risk-return profiles. Despite interruptions from various crises, this asset class has continued to grow, highlighting the inherent risks and the necessity for effective risk measurement and pricing. The interaction between sovereign and corporate risks in these markets has been largely overlooked, which this book aims to address. It begins by characterizing the current state of emerging bond markets and analyzing relevant risks. An overview of credit risk modeling literature is provided, focusing on structural and reduced-form models, along with empirical evidence supporting these approaches. The valuation of sovereign bonds is explored through a structural model that employs economic indicators as signals for payment distress, tested across several emerging markets to identify useful indicators. Building on this, a reduced-form model for pricing corporate bonds is developed, distinguishing between corporate default risk and country-induced transfer risk, applied to a unique dataset. The findings culminate in a loss distribution simulation, emphasizing the significance of country effects in emerging market bond portfolios.