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Emerging market spreads in the recent financial turmoil

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Author Info

  • Alessio Ciarlone

    ()
    (Banca d'Italia)

  • Paolo Piselli

    ()
    (Banca d'Italia)

  • Giorgio Trebeschi

    ()
    (Banca d'Italia)

Abstract

This work examines how much of the variation in emerging market economies' (EMEs) spreads can be ascribed to 'country-specific' factors rather than to 'common' factors, once the existence of an interaction between the state of macroeconomic fundamentals and global financial conditions is properly taken into account. By means of factor analysis we find that a single common factor is able to explain a large part of the covariation in EME spreads in the period January 1998-June 2008; in turn, the common factor can be traced back mainly to financial market volatility. Once we have controlled for a set of idiosyncratic macroeconomic fundamentals, the common factor turns out to be a significant determinant of EME spread variations in the recent period of financial turmoil. Finally, the interaction term between global financial conditions and the state of macroeconomic fundamentals plays a significant role in most of the countries, allowing us to show that, for some less virtuous economies, the negative effects of a worsening of global conditions have been magnified by weakening domestic macroeconomic fundamentals.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Questioni di Economia e Finanza (Occasional Papers) with number 35.

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Date of creation: Nov 2008
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Handle: RePEc:bdi:opques:qef_35_08

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Related research

Keywords: Sovereign spreads; emerging markets; factor analysis; international finance;

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Cited by:
  1. D'Agostino, Antonello & Ehrmann, Michael, 2013. "The pricing of G7 sovereign bond spreads: the times, they are a-changin," Working Paper Series 1520, European Central Bank.

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