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Global Factors and Emerging Market Spreads

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  • Martín González-Rozada
  • EduardoLevy Yeyati

Abstract

This article shows that a large fraction of the time variability of emerging market bond spreads is explained by the evolution of global factors such as risk appetite, global liquidity and contagion from systemic events such as the Russian default. This link is robust to the inclusion of country-specific factors and helps to provide accurate long-run predictions. By contrast, changes in credit ratings appear to lag spread movements and elicit little additional effect on the pricing of emerging market debt. The results highlight the critical role played by exogenous factors in the evolution of borrowing costs faced by emerging economies. Copyright � The Author(s). Journal compilation � Royal Economic Society 2008.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 118 (2008)
Issue (Month): 533 (November)
Pages: 1917-1936

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Handle: RePEc:ecj:econjl:v:118:y:2008:i:533:p:1917-1936

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  1. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  2. Alicia Garcia Herrero & Alvaro Ortiz, 2005. "The Role Of Global Risk Aversion In Explaining Latin American Sovereign Spreads," International Finance 0503005, EconWPA.
  3. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
  4. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
  5. Levy Yeyati, Eduardo & Sturzenegger, Federico, 2000. "Implications of the euro for Latin America's financial and banking systems," Emerging Markets Review, Elsevier, vol. 1(1), pages 53-81, May.
  6. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America," MPRA Paper 13843, University Library of Munich, Germany.
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