Empirical Determinants of Emerging Market Economies' Sovereign Bond Spreads
Bank of England Working Paper No. 205
38 Pages Posted: 30 Sep 2004
Date Written: November 2003
Abstract
This paper investigates the empirical determinants of emerging market sovereign bond spreads, using a ragged-edge panel of JP Morgan EMBI and EMBI Global secondary market spreads and a set of common macro-prudential indicators. The panel is estimated using the pooled mean group technique due to Pesaran, Shin and Smith (1999). This is essentially a dynamic error correction model where cross-sectional coefficients are allowed to vary in the short run but are required to be homogeneous in the long run. This allows a separation of short-run dynamics and adjustment towards the equilibrium. The model is used to benchmark market spreads and assess whether sovereign risk was 'overpriced' or 'underpriced' during different periods over the past decade. The results suggest that a debtor country's fundamentals and external liquidity conditions are important determinants of market spreads. However, the diagnostic statistics also indicate that the market assessment of a country's creditworthiness is more broad based than that provided by the set of fundamentals included in the model. We also find that the generalised fall in sovereign spreads seen between 1995 and 1997 cannot be entirely explained in terms of improved fundamentals.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
By Richard Cantor and Frank Packer
-
What Explains Changing Spreads on Emerging-Market Debt: Fundamentals or Market Sentiment?
By Barry Eichengreen and Ashoka Mody
-
The Evolution and Determinants of Emerging Market Credit Spreads in the 1990s
-
Ldc's Foreign Borrowing and Default Risk: an Empirical Investigation
-
The Evolution and Determinants of Emerging Markets Credit Spreads in the 1990s
-
Ldc Borrowing with Default Risk
By Jeffrey D. Sachs and Daniel Cohen
-
Determinants of Emerging Market Bond Spread: Do Economic Fundamentals Matter?
By Hong G. Min
-
By Barry Eichengreen and Ashoka Mody
-
By Barry Eichengreen and Ashoka Mody