Identifying Risks in Emerging Market Sovereign and Corporate Bond Spreads

59 Pages Posted: 23 Mar 2012

Date Written: July 13, 2011

Abstract

This study investigates the systematic risk factors driving emerging market (EM) credit risk by jointly modelling sovereign and corporate credit spreads at a global level. We use a multi-regional Bayesian panel VAR model, with time-varying betas and multivariate stochastic volatility. This model allows us to decompose credit spreads and to build indicators of EM risks. We find that indices of EM sovereign and corporate credit spreads differ because of their specific reactions to global risk factors. Following the failure of Lehman Brothers, EM sovereign spreads ‘decoupled’ from the US corporate market. In contrast, EM corporate bond spreads widened in response to higher US corporate default risk. We also find that the response of sovereign bond spreads to the VIX was short-lived. However, both EM sovereign and corporate bond spreads widened in flight-to-liquidity episodes, as proxied by the OIS-Treasury spread. Overall, the model is capable of generating other interesting results about the comovement of sovereign and corporate spreads.

Keywords: Bayesian econometrics, factor models, emerging markets and credit spreads

JEL Classification: F31, F34

Suggested Citation

Zinna, Gabriele, Identifying Risks in Emerging Market Sovereign and Corporate Bond Spreads (July 13, 2011). Bank of England Working Paper No. 430. Available at SSRN: https://ssrn.com/abstract=2026948 or http://dx.doi.org/10.2139/ssrn.2026948

Gabriele Zinna (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

HOME PAGE: http://gabrielezinna.github.io/

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