Emerging Market Spreads in the Recent Financial Turmoil

37 Pages Posted: 4 May 2009

Date Written: November 17, 2008

Abstract

This work examines how much of the variation in emerging market economies' (EMEs) spreads can be ascribed to 'country-specific' factors rather than to 'common' factors, once the existence of an interaction between the state of macroeconomic fundamentals and global financial conditions is properly taken into account. By means of factor analysis we find that a single common factor is able to explain a large part of the covariation in EME spreads in the period January 1998-June 2008; in turn, the common factor can be traced back mainly to financial market volatility. Once we have controlled for a set of idiosyncratic macroeconomic fundamentals, the common factor turns out to be a significant determinant of EME spread variations in the recent period of financial turmoil. Finally, the interaction term between global financial conditions and the state of macroeconomic fundamentals plays a significant role in most of the countries, allowing us to show that, for some less virtuous economies, the negative effects of a worsening of global conditions have been magnified by weakening domestic macroeconomic fundamentals.

Keywords: Sovereign spreads, emerging markets, factor analysis, international finance

JEL Classification: C10, C22, F34, G15

Suggested Citation

Ciarlone, Alessio and Piselli, Paolo and Trebeschi, Giorgio, Emerging Market Spreads in the Recent Financial Turmoil (November 17, 2008). Bank of Italy Occasional Paper No. 35, Available at SSRN: https://ssrn.com/abstract=1396223 or http://dx.doi.org/10.2139/ssrn.1396223

Alessio Ciarlone

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Paolo Piselli (Contact Author)

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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