Emerging markets financial sector debt: A Markov‐switching study of interest rate sensitivity

Abstract

We provide an empirical study on the sensitivity of capital gains of emerging market financial sector debts to the U.S. Treasury market in a three‐state Markov‐switching framework. Specifically, we model the capital gains change in a debt portfolio consisting of emerging market bonds as a linear regression of the capital gains change in a portfolio consisting of U.S. Treasury bonds in which the regression coefficients are allowed to switch between three regimes. Our analysis spans the period 2003–2016. We identify three regimes corresponding to positive sensitivity, insensitivity and negative sensitivity and provide economic explanations of our findings. We find that negative sensitivity regimes mostly occurred during the financial crisis. Our research advances understanding of the financial economics that governs the interdependence of interest rate risk and credit risk. By reassessing interest rate risk management through the prism of the downside risk hedge, our results shed light on how financial institutions may better withstand adverse financial conditions.

Faith-based investments and the Covid-19 pandemic: Analyzing equity volatility and media coverage time-frequency relations

“…Our findings can provide useful insights for institutional investors and policy makers, shedding light on the attractive hedging attributes of Islamic stocks. We document intervals of high, medium, and low coherence between the media coverage level and the price dynamics of the Dow Jones (DJ) Islamic equity indices, contributing also to the literature on nonlinear dynamics and regime switching ( Dufrénot and Jawadi, 2017 ; Gubareva and Keddad, 2020 ; and Umar and Gubareva, 2020 ). Finally, we spot our attention on the low coherence zones, which are valuable indications of the Islamic equity diversification potential.…”

Emerging market debt and the COVID‐19 pandemic: A time–frequency analysis of spreads and total returns dynamics

“…The literature on the spillover, safe‐haven, cross‐market interdependence, and hedging opportunities across assets and financial markets has attracted lot of attraction since the Global Financial Crisis (GFC); (see Gubareva & Borges, 2016; Gubareva & Borges, 2018; Riaz, Shehzad, & Umar, 2019, 2020; Gubareva & Keddad, 2020; Jawadi, Jawadi, & Cheffou, 2020; Kenourgios, Umar, & Lemonidi, 2020 and Stereńczak, Zaremba, & Umar, 2020; Umar, Shehzad, & Samitas, 2019; Umar, Shahzad, & Kenourgios, 2019; Umar, Kenourgios, Naeem, Abdulrahman, & AlHazza, 2020; Umar, Zaremba, & Olson, 2020; Zaremba, Kizys, et al, 2020; Zaremba, Umar, & Mikutowski, 2020). As mentioned earlier, the recent COVID‐19 pandemic has presented a unique challenge and inspired a new stream of literature focused on the impact of this pandemic on financial markets.…”

For whom does it pay to be a moral capitalist? Sustainability of corporate financial performance of ESG investment

“…We calculate the capital gain (CGS) from ESG investment in a chosen market as the difference between the initial and final price of the respective MSCI ESG Leaders index. We employ 3-, 6-, and 12-months-long holding period and generate the time series of the CGS with daily frequency, following previous research employing CGS metrics, see [ 24 , 43 , 44 ].…”