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Emerging Market Sovereign Spreads, Global Financial Conditions and US Macroeconomic News

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  • Fatih Ozatay
  • Erdal Ozmen
  • Gulbin Sahinbeyoglu

    ()
    (Research and Monetary Policy Department, The Central Bank of Turkey)

Abstract

This paper investigates the impact of global financial conditions, US macroeconomic news and domestic macroeconomic fundamentals on the evolution of Emerging Market Bond Index EMBI spreads for a panel of 18 emerging markets (EM) using daily data. To this end, we employ not only the conventional panel data estimation procedures, but also the recently developed common correlated effects panel mean group method which incorporates heterogeneity by allowing country-specific coefficients whilst accounting for the effects of common global shocks such as contagion. The results strongly suggest that the long-run evolution of EMBI spreads depends on external factors such as changes in global liquidity conditions, risk appetite and crises contagion. Domestic macroeconomic fundamentals, proxied by sovereign country ratings, are also found to be important in explaining the spreads. The results from panel equilibrium correction models suggest that EMBI spreads also respond substantially to US macroeconomic news, as well as changes in the Federal Reserve’s target interest rates. However, the magnitude and the sign of the effect of US macroeconomic news crucially depend on the state of the US economy, such as the presence of inflation dominance.

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Bibliographic Info

Paper provided by Economic Research Forum in its series Working Papers with number 400.

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Length: 27 pages
Date of creation: May 2008
Date of revision: May 2008
Publication status: Published by The Economic Research Forum (ERF)
Handle: RePEc:erg:wpaper:400

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References

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Cited by:
  1. Brana, Sophie & Lahet, Delphine, 2009. "Les déterminants des entrées de capitaux en Asie : quel rôle pour les stratégies de carry trade?," L'Actualité Economique, Société Canadienne de Science Economique, Société Canadienne de Science Economique, vol. 85(3), pages 283-302, septembre.
  2. Martinez, Lisana B. & Terceño, Antonio & Teruel, Mercedes, 2013. "Sovereign bond spreads determinants in Latin American countries: Before and during the XXI financial crisis," Emerging Markets Review, Elsevier, Elsevier, vol. 17(C), pages 60-75.
  3. Fatih Ozatay & Erdal Ozmen & Gülbin Sahinbeyoglu, 2007. "Emerging Market Sovereign Spreads, Global Financial Conditions and U.S. Macroeconomic News," ERC Working Papers 0707, ERC - Economic Research Center, Middle East Technical University, revised Dec 2007.
  4. Geert Bekaert & Campbell R. Harvey & Christian T. Lundblad & Stephan Siegel, 2014. "Political Risk Spreads," NBER Working Papers 19786, National Bureau of Economic Research, Inc.
  5. Luca Antonio Ricci & Marcos Chamon & Yuanyan Sophia Zhang, 2011. "Country Insurance Using Financial Instruments," IMF Working Papers 11/169, International Monetary Fund.
  6. Brana, Sophie & Lahet, Delphine, 2010. "Determinants of capital inflows into Asia: The relevance of contagion effects as push factors," Emerging Markets Review, Elsevier, Elsevier, vol. 11(3), pages 273-284, September.
  7. Fatma Pinar Erdem & Erdal Ozmen, 2014. "Exchange Rate Regimes and Business Cycles: An Empirical Investigation," ERC Working Papers 1404, ERC - Economic Research Center, Middle East Technical University, revised Jun 2014.
  8. Fatih Ozatay, 2008. "Expansionary Fiscal Consolidations: New Evidence from Turkey," Working Papers, Economic Research Forum 406, Economic Research Forum, revised May 2008.
  9. Fatih Ozatay, 2013. "Likely Candidates: Next BRICs? Turkey," Working Papers, TOBB University of Economics and Technology, Department of Economics 1305, TOBB University of Economics and Technology, Department of Economics, revised Sep 2013.
  10. Sanjeev Gupta & Amine Mati & Emanuele Baldacci, 2008. "Is it (Still) Mostly Fiscal? Determinants of Sovereign Spreads in Emerging Markets," IMF Working Papers 08/259, International Monetary Fund.
  11. Kennedy, Mike & Palerm, Angel, 2014. "Emerging market bond spreads: The role of global and domestic factors from 2002 to 2011," Journal of International Money and Finance, Elsevier, Elsevier, vol. 43(C), pages 70-87.
  12. Henri Audigé, 2014. "Net flows to emerging markets’ funds and the U.S. monetary policy after the subprime crisis," EconomiX Working Papers 2014-23, University of Paris West - Nanterre la Défense, EconomiX.
  13. Comelli, Fabio, 2012. "Emerging market sovereign bond spreads: Estimation and back-testing," Emerging Markets Review, Elsevier, Elsevier, vol. 13(4), pages 598-625.

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