Emerging Markets Spreads and Global Financial Conditions

55 Pages Posted: 7 Aug 2007

Date Written: June 2007

Abstract

In this article, we analyse how much of the reduction in emerging markets spreads can be ascribed to specific factors - linked to the improvement in the 'fundamentals' of a given country - rather than to common factors - linked to global liquidity conditions and agents' degree of risk aversion. By means of factor analysis, we find that a single common factor is able to explain a large part of the co-variation in emerging market economies spreads observed in the last four years; on its turn, this common factor might be traced back mainly to financial markets volatility. Due to the particularly benign global financial conditions in recent years, spreads seem to have declined to levels lower than those warranted by improved fundamentals. As a consequence, EMEs do remain vulnerable to sudden shift in financial market conditions.

Keywords: emerging markets, spreads, factor analysis

JEL Classification: C10, C22, F34, G15

Suggested Citation

Ciarlone, Alessio and Piselli, Paolo and Trebeschi, Giorgio, Emerging Markets Spreads and Global Financial Conditions (June 2007). Bank of Italy Temi di Discussione (Working Paper) No. 637, Available at SSRN: https://ssrn.com/abstract=1005302 or http://dx.doi.org/10.2139/ssrn.1005302

Alessio Ciarlone (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Paolo Piselli

Bank of Italy ( email )

Via Milano, 64
00184 Rome
Italy

Giorgio Trebeschi

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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