Sovereign risk mispricing and investor herding: MENA debt markets

In response to the scarce evidence regarding herd behaviour in emerging and frontier debt markets, this paper investigates the potential mispricing of MENA sovereign risk. We explore whether this mispricing results from international investor herding, where MENA debt assets are collectively treated as a singular class, rather than being influenced by macroeconomic fundamentals. Leveraging high-frequency financial datasets spanning 55 countries from 2004 to 2024, we utilize various regression specifications and apply the Blinder-Oaxaca decomposition approach to uncover the determinants of sovereign risk pricing in MENA compared to other global regions. The results reveal a distinct asymmetric herd behaviour in MENA debt markets, emphasizing the treatment of MENA debt assets as a unified category. Furthermore, our findings suggest that the mispricing of MENA sovereign risk predominantly arises from discriminatory conduct by international investors, rather than disparities in the quality of macroeconomic fundamentals between MENA and non-MENA regions.