How news affects sovereign spreads

• Author: Paolo Mauro, Nathan Sussman, and Yishay Yafeh

Emerging Markets and Financial Globalization Sovereign Bond Spreads in 1870-1913 and Today

Oxford University Press, Oxford, 2006, 200 pp., $74 (cloth).

What can emerging market countries do to lower their cost of borrowing in international capital markets? In this timely book on the determinants of emerging market spreads, economists Paolo Mauro, Nathan Sussman, and Yishay Yafeh attempt to answer this important question.

The analysis in the book is based on a comparison of two historical periods characterized by unusually lively trading in emerging market sovereign bonds. The first period is 1870-1913, sometimes called the first era of financial globalization because government bonds from all over the world were traded on the large bond market in London. The second period covers the early 1990s, when the market in Brady bonds took off. Comparing sovereign spreads from two so obviously different historical periods is not, of course, without its problems. For example, there are differences in the way bonds were issued (in terms of maturity length and redemption clauses) and how bond yields were, and should be, calculated. However, these problems do not diminish the merits of attempting a comparison in the first place. In my opinion, the comparison is a truly original and innovative methodological contribution and makes this book stand out among other books on the same topic.

The authors set out to uncover the most important factors driving emerging market spreads in 1870 and today. They do so by linking significant shifts in bond spreads to different types of news as covered by the media. By classifying news into different categories such as "wars," "bad economic news," "reform," and "debt-related news," the authors are able to get a precise picture of the kind of information driving the spreads. Of course, one may question whether findings based on news about wars can be generalized into findings about actual wars.

Using panel data regressions on the full sample of countries, the authors successfully show that news about wars and instability does, in fact, have a...