Credit Spread Dynamics: Evidence from Latin America

This paper examines the behaviour of credit spreads on key sovereign issuers from the Latin American region, which accounts for more than one third of international bond issues by developing, or emerging, markets. Since the late 1990s, credit spreads on Latin American issues have declined broadly inline with those in other emerging markets. Recent empirical analysis has explained this phenomenon by identifying critical macroeconomic factors, including the reduction in systematic risk in individual markets, although the structural models from the theoretical finance literature also predict the importance of key default and interest rate variables. This contribution adds to the understanding of these issues by investigating the application of structural models to the Latin American setting, one historically characterized by excessive volatility and susceptibility to episodes of default.