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International Monetary Fund

primarily determined by unmeasurable non-economic events such as the domestic political climate in borrowing countries or changes in the substitutability of loans for other assets. This study identifies empirically the measurable indicators that move secondary market sovereign loan prices. A panel of secondary market price changes encompassing 21 sovereign borrowers over a 43-month interval is used in the analysis. 3/ The responsiveness of debt price changes to three classes of economic news is estimated. The hypothesis that debt prices are impacted by unexpected

International Monetary Fund
The sensitivity of secondary sovereign loan market returns to three classes of economic news is estimated in the arbitrage pricing theory framework. Returns are characterized by a limited response to unexpected changes in procyclical U.S. aggregates. Shocks to country-specific balance of payment indicators do not impact debt prices. Announcements of policy changes by creditors and third parties that presage changes in future lending induce large debt price changes. The failure of the data to meet the empirical arbitrage pricing theory restrictions and the large proportion of return variance unexplained by macroeconomic fundamentals highlight the differences between corporate and sovereign securities.