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: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
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