IDEAS home Printed from https://ideas.repec.org/p/boe/boeewp/205.html
   My bibliography  Save this paper

Empirical determinants of emerging market economies' sovereign bond spreads

Author

Listed:
  • Gianluigi Ferrucci

Abstract

In this paper the empirical determinants of emerging market sovereign bond spreads are estimated, using a ragged-edge panel of JP Morgan EMBI and EMBI Global secondary market spreads and a set of common macro-prudential indicators. The panel is estimated using the pooled mean group technique of Pesaran, Shin and Smith. This is essentially a dynamic error correction model where cross-sectional coefficients are allowed to vary in the short run but are required to be homogeneous in the long run. It allows a separation of short-run dynamics and adjustment towards the equilibrium. The model is used to benchmark market spreads and assess whether sovereign risk was overpriced or underpriced during different periods over the past decade. The results suggest that a debtor country's fundamentals and external liquidity conditions are important determinants of market spreads. However, the diagnostic statistics also indicate that the market assessment of a country's creditworthiness is more broad based than that provided by the set of fundamentals included in the model. It is found that the generalised fall in sovereign spreads seen between 1995 and 1997 cannot be entirely explained in terms of improved fundamentals.

Suggested Citation

  • Gianluigi Ferrucci, 2003. "Empirical determinants of emerging market economies' sovereign bond spreads," Bank of England working papers 205, Bank of England.
    • Handle: RePEc:boe:boeewp:205
    as

    Download full text from publisher

    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/2003/wp205.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Barry Eichengreen & Ashoka Mody, 1998. "Interest Rates in the North and Capital Flows to the South: Is There a Missing Link?," International Finance, Wiley Blackwell, vol. 1(1), pages 35-57, October.
    2. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-853, October.
    3. Calvo, Guillermo A. & Mendoza, Enrique G., 1996. "Mexico's balance-of-payments crisis: a chronicle of a death foretold," Journal of International Economics, Elsevier, vol. 41(3-4), pages 235-264, November.
    4. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    5. Yongcheol Shin & Ron P Smith & Mohammad Hashem Pesaran, 1998. "Pooled Mean Group Estimation of Dynamic Heterogeneous Panels," Edinburgh School of Economics Discussion Paper Series 16, Edinburgh School of Economics, University of Edinburgh.
    6. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
    7. Barry Eichengreen & Ashoka Mody, 1998. "What Explains Changing Spreads on Emerging-Market Debt: Fundamentals or Market Sentiment?," NBER Working Papers 6408, National Bureau of Economic Research, Inc.
    8. Feder, Gershon & Just, Richard E., 1977. "A study of debt servicing capacity applying logit analysis," Journal of Development Economics, Elsevier, vol. 4(1), pages 25-38, February.
    9. Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 228-248, April.
    10. Mario Draghi & Francesco Giavazzi & Robert C. Merton, 2003. "Transparency, Risk Management and International Financial Fragility," NBER Working Papers 9806, National Bureau of Economic Research, Inc.
    11. Mr. Giovanni Dell'Ariccia & Mr. Jeromin Zettelmeyer & Ms. Isabel Schnabel, 2002. "Moral Hazard and International Crisis Lending: A Test," IMF Working Papers 2002/181, International Monetary Fund.
    12. International Monetary Fund, 1999. "Neglected Heterogeneity and Dynamics in Cross-Country Savings Regressions," IMF Working Papers 1999/128, International Monetary Fund.
    13. Richard Cantor & Frank Packer, 1996. "Determinants and impact of sovereign credit ratings," Economic Policy Review, Federal Reserve Bank of New York, vol. 2(Oct), pages 37-53.
    14. Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 48(2), pages 289-309.
    15. Baltagi, Badi H. & Griffin, James M., 1997. "Pooled estimators vs. their heterogeneous counterparts in the context of dynamic demand for gasoline," Journal of Econometrics, Elsevier, vol. 77(2), pages 303-327, April.
    16. Haque, N. U. & Pesaran, M. H. & Sharma, Sunil, 1999. "Neglected Heterogeneity and Dynamics in Cross-country Savings Regressions," Cambridge Working Papers in Economics 9904, Faculty of Economics, University of Cambridge.
    17. Eaton, Jonathan & Gersovitz, Mark, 1980. "LDC participation in international financial markets : Debt and reserves," Journal of Development Economics, Elsevier, vol. 7(1), pages 3-21, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Eduardo Borensztein & Ugo Panizza, 2009. "The Costs of Sovereign Default," IMF Staff Papers, Palgrave Macmillan, vol. 56(4), pages 683-741, November.
    2. Gelos, R. Gaston & Sahay, Ratna & Sandleris, Guido, 2011. "Sovereign borrowing by developing countries: What determines market access?," Journal of International Economics, Elsevier, vol. 83(2), pages 243-254, March.
    3. Peter Rowland & José Luis Torres, 2004. "Determinants of Spread and Creditworthiness for Emerging Market Sovereign Debt:A Panel Data Study," Borradores de Economia 295, Banco de la Republica de Colombia.
    4. Becker, Torbjorn & Richards, Anthony & Thaicharoen, Yunyong, 2003. "Bond restructuring and moral hazard: are collective action clauses costly?," Journal of International Economics, Elsevier, vol. 61(1), pages 127-161, October.
    5. Mr. Sanjeev Gupta & Mr. Amine Mati & Mr. Emanuele Baldacci, 2008. "Is it (Still) Mostly Fiscal? Determinants of Sovereign Spreads in Emerging Markets," IMF Working Papers 2008/259, International Monetary Fund.
    6. Landon, Stuart & Smith, Constance E., 2009. "Investment and the exchange rate: Short run and long run aggregate and sector-level estimates," Journal of International Money and Finance, Elsevier, vol. 28(5), pages 813-835, September.
    7. Steven B. Kamin, 2002. "Identifying the role of moral hazard in international financial markets," International Finance Discussion Papers 736, Board of Governors of the Federal Reserve System (U.S.).
    8. Peter Rowland, 2004. "The Colombian Sovereign Spread And Its Determinants," Borradores de Economia 3572, Banco de la Republica.
    9. Samir Jahjah & Bin Wei & Vivian Zhanwei Yue, 2013. "Exchange Rate Policy and Sovereign Bond Spreads in Developing Countries," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(7), pages 1275-1300, October.
    10. Diaz Weigel, Diana & Gemmill, Gordon, 2006. "What drives credit risk in emerging markets? The roles of country fundamentals and market co-movements," Journal of International Money and Finance, Elsevier, vol. 25(3), pages 476-502, April.
    11. Ioana Alexopoulou & Irina Bunda & Annalisa Ferrando, 2010. "Determinants of Government Bond Spreads in New EU Countries," Eastern European Economics, Taylor & Francis Journals, vol. 48(5), pages 5-37, September.
    12. Peter Rowland, 2005. "Buyback of Colombian Sovereign Debt," Borradores de Economia 331, Banco de la Republica de Colombia.
    13. Ana-Maria Fuertes & Elena Kalotychou, 2004. "Forecasting sovereign default using panel models: A comparative analysis," Computing in Economics and Finance 2004 228, Society for Computational Economics.
    14. Hong G. Min, 1998. "Determinants of emerging market bond spread : do economic fundamentals matter?," Policy Research Working Paper Series 1899, The World Bank.
    15. Polito, Vito & Wickens, Mike, 2014. "Modelling the U.S. sovereign credit rating," Journal of Banking & Finance, Elsevier, vol. 46(C), pages 202-218.
    16. Camba-Méndez, Gonzalo & Serwa, Dobromił, 2016. "Market perception of sovereign credit risk in the euro area during the financial crisis," The North American Journal of Economics and Finance, Elsevier, vol. 37(C), pages 168-189.
    17. Spadafora, Francesco, 2003. "Official bailouts, moral hazard and the 'speciality' of the international interbank market," Emerging Markets Review, Elsevier, vol. 4(2), pages 165-196, June.
    18. Luis Catão & Sandeep Kapur, 2006. "Volatility and the Debt-Intolerance Paradox," IMF Staff Papers, Palgrave Macmillan, vol. 53(2), pages 1-1.
    19. Sam Jones, 2011. "Aid Supplies Over Time: Accounting for Heterogeneity, Trends and Dynamics," WIDER Working Paper Series wp-2011-004, World Institute for Development Economic Research (UNU-WIDER).
    20. Alamgir, Farzana & Cotoc, Johnny & Johri, Alok, 2023. "The bribe rate and long run differences in sovereign borrowing costs," Journal of Economic Dynamics and Control, Elsevier, vol. 151(C).

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:boe:boeewp:205. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Digital Media Team (email available below). General contact details of provider: https://edirc.repec.org/data/boegvuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.