Does default probability matter in Latin American emerging markets?

This is an accepted manuscript of an article published by Taylor & Francis in Emerging Markets Finance and Trade on 2014/12/7, available online: http://dx.doi.org/10.2753/REE1540-496X490504.We analyse the impact of default probability in four leading Latin American stock markets (Argentina, Brazil, Chile and Mexico). We find no positive default risk premium except in the case of Brazil, and in fact find a negative risk premium for Argentina and Mexico. The latter effect tends to fade when the analysis accounts for size and BTM market variables. Although we find no size effect in any of the markets considered, the BTM effect is very strong in all of them, and our results reveal a consistent relationship, analogous to that found in more developed markets, between default probability and the size and book-to-market variables.This paper has received financial supp ort from the Spanish Ministry of Science and Innovation (ECO2009-12819) and the Ministry of Economy and Competitiveness (ECO2012-35946-C02-01). Isabel Abinzano particularly acknowledges the financial support of the Andalusian Regional Government (P09-SEJ-4467)