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Modelling sovereign credit spreads with international macro-factors: The case of Brazil 1998–2009

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  • Liu, Zhuoshi
  • Spencer, Peter

Abstract

This paper develops a macro-finance model of the Brazilian economy and its sovereign debt markets that allows for domestic and international macroeconomic influences as well as swings in investor confidence. It finds significant evidence of common trends in the US and Brazilian economies and bond markets as well as spillover effects from US inflation and business cycles to the Brazilian economy. The US Fed Funds rate influences Brazilian sovereign spreads, as do Brazilian inflation and policy rates. The Brazilian confidence factor dominates the behavior of the spreads during periods of crisis and we find that it also has a powerful effect on the level and volatility of macroeconomic variables. These results suggest that the macro-finance approach could throw light upon the behavior of other economies that are troubled by sovereign risk.

Suggested Citation

  • Liu, Zhuoshi & Spencer, Peter, 2013. "Modelling sovereign credit spreads with international macro-factors: The case of Brazil 1998–2009," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 241-256.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:2:p:241-256
    DOI: 10.1016/j.jbankfin.2012.08.012
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    Cited by:

    1. Crifo, Patricia & Diaye, Marc-Arthur & Oueghlissi, Rim, 2017. "The effect of countries’ ESG ratings on their sovereign borrowing costs," The Quarterly Review of Economics and Finance, Elsevier, vol. 66(C), pages 13-20.
    2. Patricia Crifo & Marc-Arthur Diaye & Rim Oueghlissi, 2014. "Measuring the effect of government ESG performance on sovereign borrowing cost," CIRANO Working Papers 2014s-37, CIRANO.
    3. Jiahe Lin & George Michailidis, 2019. "Approximate Factor Models with Strongly Correlated Idiosyncratic Errors," Papers 1912.04123, arXiv.org.
    4. Jose E. Gomez-Gonzalez & Jorge M. Uribe & Oscar M. Valencia, 2023. "Sovereign Risk and Economic Complexity: Machine Learning Insights on Causality and Prediction," IREA Working Papers 202315, University of Barcelona, Research Institute of Applied Economics, revised Nov 2023.
    5. Jose E. Gomez-Gonzalez & Jorge M. Uribe & Oscar M. Valencia, 2023. "Risk spillovers between global corporations and Latin American sovereigns: global factors matter," Applied Economics, Taylor & Francis Journals, vol. 55(13), pages 1477-1496, March.
    6. Jeanneret, Alexandre & Souissi, Slim, 2016. "Sovereign defaults by currency denomination," Journal of International Money and Finance, Elsevier, vol. 60(C), pages 197-222.
    7. Gomez-Gonzalez, Jose E. & Uribe, Jorge M. & Valencia, Oscar, 2024. "Sovereign Risk and Economic Complexity," IDB Publications (Working Papers) 13393, Inter-American Development Bank.
    8. Jose E. Gomez-Gonzalez & Jorge M. Uribe & Oscar M. Valencia, 2024. "Asymmetric Sovereign Risk: Implications for Climate Change Preparation," IREA Working Papers 202401, University of Barcelona, Research Institute of Applied Economics, revised Jan 2024.
    9. M. Utku Özmen, 2019. "Economic complexity and sovereign risk premia," Economics Bulletin, AccessEcon, vol. 39(3), pages 1714-1726.

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    More about this item

    Keywords

    Affine term structure model; Macro-finance; Sovereign credit spread; International spillover; Macroeconomic volatility;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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