Sovereign Risk and Global Macroeconomic Conditions

58 Pages Posted: 2 May 2018 Last revised: 13 Apr 2019

See all articles by Sandro C. Andrade

Sandro C. Andrade

University of Miami - Department of Finance

Adelphe Ekponon

University of Cambridge - Judge Business School

Alexandre Jeanneret

HEC Montréal

Date Written: April 6, 2019

Abstract

This paper studies how global macroeconomic conditions affect sovereign bond prices. Weak and volatile economic performance during recessions increases a country’s default probability more than strong and stable performance during expansions reduces it, leading to countercyclical and unconditionally high sovereign credit spreads. We identify the sovereign risk premium arising from such exposure to severe but low-frequency changes in global macroeconomic conditions. Our model predicts that this risk premium is higher for countries that are more exposed to the global business cycle, particularly around recessions. We find support for this prediction using emerging market sovereign bond data over the 1994Q1-2018Q2 period.

Keywords: Sovereign debt, credit risk, asset pricing, macroeconomic conditions

JEL Classification: F34, G12, G13, G15, G32

Suggested Citation

Andrade, Sandro C. and Ekponon, Adelphe and Jeanneret, Alexandre, Sovereign Risk and Global Macroeconomic Conditions (April 6, 2019). University of Miami Business School Research Paper No. 3162853. Available at SSRN: https://ssrn.com/abstract=3162853 or http://dx.doi.org/10.2139/ssrn.3162853

Sandro C. Andrade

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

HOME PAGE: http://moya.bus.miami.edu/~sandrade/

Adelphe Ekponon

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

HOME PAGE: http://sites.google.com/site/adelpheekponon/

Alexandre Jeanneret (Contact Author)

HEC Montréal ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

HOME PAGE: http://www.alexandrejeanneret.net

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