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Three essays on emerging capital markets

Iuliana Ismailescu, University of Massachusetts Amherst


With recent trends toward globalization and capital market integration, emerging markets have increasingly become the target of many investors in search for higher returns. Before placing their money abroad, however, investors need to bear considerable challenges in mind. While investments in developing economies can result in spectacular returns, emerging capital markets can be highly volatile, reacting strongly to the international investor sentiment, and economic and political changes. Understanding these risks is critically important to those who want to navigate successfully through emerging capital markets. Elucidating some of the challenges faced by the emerging market investor is the aim of my thesis. This dissertation consists of three essays addressing different issues related to emerging capital markets: (1) contagion in emerging debt markets, (2) closed-end fund managerial performance and other factors affecting fund premiums, and (3) the relationship between credit default swap (CDS) spreads and sovereign credit rating changes. In the first essay I test for the existence of contagion in emerging debt markets following Russia and Argentina's government defaults. Using several techniques that have been previously suggested to test for contagion in stock markets I find that debt and stock markets respond differently to financial crises. In the second essay I show that country fund premiums strongly reflect past management skill, but are also indicative of the investors' expectations about future managerial performance. Additionally, in time-series analyses country funds, regional equity funds and global bond funds are influenced quite differently by the suggested factors. In cross-sectional regressions, three variables emerge as significant in explaining the variation in fund premiums: the U.S. investor sentiment, excess volatility, and fund liquidity. In the third essay, inconsistent with previous work, I find that positive events are more anticipated, have a more consistent impact on sovereign CDS markets in the short period surrounding the event, and are more likely to spill over to other emerging markets, whereas negative events have a higher probability of being predicted by the CDS premium. Last, in an investigation of the determinants of emerging market CDS spread changes, I find that financial factors appear to explain spread changes better than either macroeconomic variables or political risk.

Subject Area

Finance|Economic theory

Recommended Citation

Ismailescu, Iuliana, "Three essays on emerging capital markets" (2008). Doctoral Dissertations Available from Proquest. AAI3325257.