On Emerging Economy Sovereign Spreads and Ratings

42 Pages Posted: 25 Apr 2011

See all articles by Andrew Powell

Andrew Powell

Inter-American Development Bank (IDB); Universidad Torcuato Di Tella - School of Business; Harvard University - Center for International Development (CID)

Juan F. Martinez S.

affiliation not provided to SSRN

Date Written: January 2008

Abstract

This paper analyzes alternative models for emerging sovereign ratings. Although a small number of economic fundamentals explain ratings reasonably well, variations in those economic fundamentals are themselves explained by a small number of world factors. On the other hand, global financial variables associated with risk aversion are additionally required in order to explain the significant spread compression at the end of 2006. To determine whether ratings matter for spreads, the paper compares results across different methodologies, in particular exploiting differences in opinion between rating agencies. The evidence from this and previous methodologies is that ratings do matter. Finally, the paper finds that global indicators of risk aversion have become less important for emerging market spreads and that the effect of sub-prime news is less than the effect of “average news” on emerging economy credit default swap (CDS) spreads.

Suggested Citation

Powell, Andrew P. and Powell, Andrew P. and Martinez S., Juan F., On Emerging Economy Sovereign Spreads and Ratings (January 2008). IDB Working Paper No. 530, Available at SSRN: https://ssrn.com/abstract=1820918 or http://dx.doi.org/10.2139/ssrn.1820918

Andrew P. Powell (Contact Author)

Inter-American Development Bank (IDB) ( email )

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Universidad Torcuato Di Tella - School of Business ( email )

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Harvard University - Center for International Development (CID) ( email )

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Juan F. Martinez S.

affiliation not provided to SSRN

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