Fundamentals and Sovereign Risk of Emerging Markets

39 Pages Posted: 13 Apr 2013 Last revised: 25 Apr 2013

See all articles by Joshua Aizenman

Joshua Aizenman

University of Southern California - Department of Economics; National Bureau of Economic Research (NBER)

Joshua Aizenman

National Bureau of Economic Research (NBER)

Yothin Jinjarak

University of London - SOAS - Department of Financial and Management Studies

Donghyun Park

Asian Development Bank - Economic Research

Date Written: April 2013

Abstract

We empirically assess the relative importance of various economic fundamentals in accounting for the sovereign credit default swap (CDS) spreads of emerging markets during 2004-2012, which encompasses the global financial crisis of 2008-2009. Inflation, state fragility, external debt, and commodity terms of trade volatility were positively associated, while trade openness and more favourable fiscal balance/GDP ratio were negatively associated with sovereign CDS spreads. Yet the relative importance of economic fundamentals in the pricing of sovereign risk varies over time. The key factors are trade openness and state fragility in the pre-crisis period, external debt/GDP ratio and inflation in the crisis period, and inflation and public debt/GDP ratio in the post- crisis period. Asian countries enjoy lower sovereign spreads than Latin American countries, and this gap widened during and after the crisis. Trade openness was the biggest factor behind Asia's lower sovereign spreads before the crisis, and inflation during and after the crisis. The results imply that external factors were paramount in pricing sovereign risk prior to the crisis, but internal factors associated with the capacity to adjust to adverse shocks gained prominence during and after the crisis.

Suggested Citation

Aizenman, Joshua and Aizenman, Joshua and Jinjarak, Yothin and Park, Donghyun, Fundamentals and Sovereign Risk of Emerging Markets (April 2013). NBER Working Paper No. w18963. Available at SSRN: https://ssrn.com/abstract=2250272

Joshua Aizenman (Contact Author)

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Joshua Aizenman

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yothin Jinjarak

University of London - SOAS - Department of Financial and Management Studies ( email )

College Buildings
Russell Square
London, WC1H 0XG
United Kingdom

HOME PAGE: http://https://sites.google.com/site/yothinjinjarak/

Donghyun Park

Asian Development Bank - Economic Research ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

Register to save articles to
your library

Register

Paper statistics

Downloads
18
Abstract Views
335
PlumX Metrics