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What drives the commodity-sovereign-risk-dependence in emerging market economies?

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  • Böhm, Hannes
  • Eichler, Stefan
  • Gießler, Stefan

Abstract

Using daily data for 34 emerging markets in the period 1994-2016, we find robust evidence that higher export commodity prices are associated with higher sovereign bond returns (indicating lower sovereign risk). The economic effect is especially pronounced for heavy commodity exporters. Examining the drivers, we find, first, that commodity-dependence is higher for countries that export large volumes of volatile commodities and that the effect increases in times of recessions, high inflation, and expansionary U.S. monetary policy. Second, the importance of raw material prices for sovereign financing can likely be mitigated if a country improves institutions and tax systems, attracts FDI inflows, invests in manufacturing, machinery and infrastructure, builds up reserve assets and opens capital and trade accounts. Third, the concentration of commodities within a country's portfolio, its government indebtedness or amount of received development assistance appear to be only of secondary importance for commodity-dependence.

Suggested Citation

  • Böhm, Hannes & Eichler, Stefan & Gießler, Stefan, 2019. "What drives the commodity-sovereign-risk-dependence in emerging market economies?," IWH Discussion Papers 23/2019, Halle Institute for Economic Research (IWH).
  • Handle: RePEc:zbw:iwhdps:232019
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    References listed on IDEAS

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    More about this item

    Keywords

    sovereign bond prices; commodity prices; international finance; emerging market economies; institutions; U.S. monetary policy;
    All these keywords.

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products

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