Sound Policies or Good Fortune: What Drives Emerging Market Spreads?

35 Pages Posted: 21 Feb 2008

See all articles by Philipp Maier

Philipp Maier

Bank of Canada - International Department

Garima Vasishtha

International Monetary Fund

Date Written: February 19, 2008


Since 2002, spreads on emerging market sovereign debt have fallen to historical lows. Given the close links between sovereign spreads, capital flows to emerging markets, and economic growth, understanding the factors driving sovereign spreads is very important. This paper uses factor analysis to study the extent to which emerging market bond spreads - measured by JP Morgan's EMBI Global index - are driven by global factors, such as global liquidity or commodity prices, as opposed to country-specific macroeconomic fundamentals. Our results show that a common factor explains a substantial portion of the co-movements in emerging market spreads in the last decade. This factor is closely linked to global financial conditions, as well as to energy- and non-energy commodity prices. This factor, however, is not responsible for the reduction in EMBI spreads. Instead, emerging markets have benefited considerably from better macroeconomic policies. Therefore, a reversal of the benign global economic environment need not have a substantial negative impact on financing conditions for emerging markets.

Keywords: Sovereign spreads, emerging markets, factor analysis

JEL Classification: E43, F34, F47, G12, G15

Suggested Citation

Maier, Philipp and Vasishtha, Garima, Sound Policies or Good Fortune: What Drives Emerging Market Spreads? (February 19, 2008). Available at SSRN: or

Philipp Maier

Bank of Canada - International Department ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9

Garima Vasishtha (Contact Author)

International Monetary Fund ( email )

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