The Normal, the Fat-Tailed, and the Contagious: Modeling Changes in Emerging Market Bond Spreads
This paper examines the statistical properties of daily changes in emerging market bond spreads over US treasuries, and simulates an agent-based model to attempt to replicate those properties. The actual data indicate that changes in spreads are definitely not normally distributed, exhibiting much fatter tails. It further indicates that the data are serially correlated, suggesting deviation from market efficiency, and exhibits excessive co-movement, suggesting contagion. A simple model of interacting traders produces alternating booms and crashes, as in reality, but is not capable of producing fat-tailed distributions or contagion.