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The role of global risk aversion in explaining Latin American sovereign spreads

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  • Alicia García-Herrero

    ()
    (Banco de España)

  • Álvaro Ortiz

    ()
    (Repsol-YPF)

Abstract

This paper assesses empirically whether global risk aversion (GRA) and some if its determinants (US economic growth and the US long term interest rates) explain developments in Latin American sovereign spreads. We find that GRA is significant and positively related to Latin American sovereign spreads and that its impact varies across countries and over time. Chile, with a lower sovereign risk, is relatively more affected. The opposite is true for Argentina, Ecuador and Venezuela. In addition, the influence of GRA on spreads has risen since the Enron scandal. Finally, both an increase in US economic growth and US long term interest rates are found to reduce spreads while the opposite is true for US short term interest rates.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/05/Fic/dt0505e.pdf
File Function: First version, February 2005
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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0505.

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Length: 51 pages
Date of creation: Feb 2005
Date of revision:
Handle: RePEc:bde:wpaper:0505

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Keywords: global risk aversion; sovereign spreads; latin america;

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  1. Gertler, Mark & Lown, Cara S, 1999. "The Information in the High-Yield Bond Spread for the Business Cycle: Evidence and Some Implications," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 15(3), pages 132-50, Autumn.
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  3. Charles S. Morris & Robert Neal & Douglas Rolph, 1998. "Credit spreads and interest rates : a cointegration approach," Research Working Paper, Federal Reserve Bank of Kansas City 98-08, Federal Reserve Bank of Kansas City.
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  9. Patrick McGuire & Martijn A Schrijvers, 2003. "Common factors in emerging market spreads," BIS Quarterly Review, Bank for International Settlements, Bank for International Settlements, December.
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  15. Olivier Blanchard, 2004. "Fiscal Dominance and Inflation Targeting: Lessons from Brazil," NBER Working Papers 10389, National Bureau of Economic Research, Inc.
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