Managing Market Risk for an Emerging Market Debt Portfolio

Abstract

Investors in the emerging debt market are exposed to a number of different types of risk, most importantly market risk. This article introduces a risk metric called beta spread duration (BSD), which is designed to measure aggregate market risk. BSD builds on two well–known metrics, beta and spread duration, and applies them to the emerging debt market. The authors demonstrate that BSD is a statistically significant measure of overall market risk and identify its limitations. They show that while market risk explains the majority of spread changes, individual country risk still matters. Indeed, they show that large changes in country risk can dominate overall market risk over shorter time frames while also exhibiting statistical significance over longer periods.