Testing For Weak-Level Efficiency In The Secondary Market For Developing Country Debt

Abstract

This paper investigates the presence of weak level efficiency in the secondary market for developing country debt y modeling as ARIMA processes debt price variations of eight large debtor countries that were actively traded during the period January 1986 to December 1992. The analysis suggests that in some cases the secondary market for developing-country debt was weakly inefficient and that there existed at least one trading rule capable of generating above-average returns. Moreover, the narrowing of above-average returns in the period following the announcement of the Brady Plan suggests that the secondary market for developing country debit became more efficient, possibly due to a reduction in default risk and an increase in the availability of timely investment information.