Dissertation: Emerging market bonds are risky business
“The impact of emerging markets on the global economy has increased drastically in recent decades,” says Dimic, “as emerging countries contain the majority of the world’s land and population, they represent the major force in the global economy, and have superior rates of economic growth relative to the developed countries.”
“Although much has been learned about emerging economies, our knowledge is still far from complete on many issues,” explains Dimic who will defend his thesis at the University of Vaasa. His dissertation provides various new insights into the nature of emerging market assets.
Basic theory of financial assets argues that during times of financial turmoil, investors tend to substitute risky assets (stocks) for safer assets (bonds). However, the relationship between stock and bond prices is altered in emerging markets.
In his dissertation, Dimic argues that emerging market bonds should not be assigned the properties of a safe investment relative to emerging market stocks.
These findings demonstrate that emerging market bonds have equity-like characteristics and in reality are much riskier than what theory suggests.
Emerging market assets are vulnerable to country’s specific political risk
Political uncertainty is one of the major factors influencing emerging economies. Recent events like the Arab Spring in the MENA region, civil war in Libya, and riots in Egypt and Tunisia during 2011, the political and military crisis in Thailand during 2006, and the turmoil in Ukraine in 2014 are greatly impacted emerging economies.
“I find that government actions as a specific source of political risk uniformly have a negative effect on the stock returns both emerging and developed markets” says Dimic, “however, political risk related to rising ethnic tensions has a negative impact on the stock returns only in emerging countries.
“This implies that racial, nationality, or language divisions are associated with lower stock returns in emerging markets” he explains.
Further, his dissertation finds that the risk associated with corruption, democratic regime change, and investment profile is extremely important for international investors to consider as they have negative impact on assets in emerging markets.
Issuing bonds in emerging markets is very risky for US firms
Dimic studies the United States (US) firms’ valuation effects after issuing bonds in overseas markets.
“Results show that, in general, issuing bonds abroad has a positive short-term effect on a firm’s valuation. However, I show that this positive short-term effect on firm valuation is conditional given that US firms issue bonds in other developed markets,” explains Dimic.
These findings imply that those US firms that issue bonds in emerging markets experience a significant negative long-term valuation effects due to the poor governance standards and low investor protection in emerging economies.
Nebojsa Dimic, tel. +358 45 104 7707, email nebojsa.dimic(at)uwasa.fi
Dimic, Nebojsa (2017) Essays on emerging market finance. Acta Wasaensia 384. Vaasan yliopisto. University of Vaasa.
The public examination of M.Sc. Nebojsa Dimic´s doctoral dissertation “Essays on emerging market finance” will be held on Friday 3 November at noon in auditorium Nissi (K218, Tritonia). The field of dissertation is finance.
Assistant Professor Laurens Swinkels (Erasmus University Rotterdam, The Netherlands) will act as opponent and Professor Janne Äijö as custos. The examination will be held in English