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On Emerging Economy Sovereign Spreads and Ratings

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  • Andrew Powell
  • Juan F. Martinez S.

Abstract

This paper analyzes alternative models for emerging sovereign ratings. Although a small number of economic fundamentals explain ratings reasonably well, variations in those economic fundamentals are themselves explained by a small number of world factors. On the other hand, global financial variables associated with risk aversion are additionally required in order to explain the significant spread compression at the end of 2006. To determine whether ratings matter for spreads, the paper compares results across different methodologies, in particular exploiting differences in opinion between rating agencies. The evidence from this and previous methodologies is that ratings do matter. Finally, the paper finds that global indicators of risk aversion have become less important for emerging market spreads and that the effect of sub-prime news is less than the effect of “average news” on emerging economy credit default swap (CDS) spreads.

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Bibliographic Info

Paper provided by Inter-American Development Bank, Research Department in its series Research Department Publications with number 4565.

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Date of creation: Jan 2008
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Handle: RePEc:idb:wpaper:4565

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References

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  1. Marcio Garcia & Roberto Rigobon, 2004. "A Risk Management Approach to Emerging Market's Sovereign Debt Sustainability with an Application to Brazilian Data," NBER Working Papers 10336, National Bureau of Economic Research, Inc.
  2. Hausmann, Ricardo & Panizza, Ugo, 2003. "On the determinants of Original Sin: an empirical investigation," Journal of International Money and Finance, Elsevier, vol. 22(7), pages 957-990, December.
  3. Kevin Cowan & Eduardo Levy-Yeyati & Ugo Panizza & Federico Sturzenegger, 2006. "Sovereign Debt in the Americas: New Data and Stylized Facts," Working Papers Central Bank of Chile 371, Central Bank of Chile.
  4. António Afonso & Pedro Gomes & Philipp Rother, 2007. "What “hides” behind sovereign debt ratings?," Working Paper Series 711, European Central Bank.
  5. Axel Schimmelpfennig & Nouriel Roubini & Paolo Manasse, 2003. "Predicting Sovereign Debt Crises," IMF Working Papers 03/221, International Monetary Fund.
  6. Guillermo Calvo & Alejandro Izquierdo & Luis-Fernando Mejía, 2004. "On the empirics of Sudden Stops: the relevance of balance-sheet effects," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  7. Roberto Rigobon & Marcio Garcia, 2004. "A Risk Management Approach to Emerging Market’s Sovereign Debt Sustainability with an application to Brazilian data," Econometric Society 2004 Latin American Meetings 24, Econometric Society.
  8. Richard Cantor & Frank Packer, 1996. "Determinants and impacts of sovereign credit ratings," Research Paper 9608, Federal Reserve Bank of New York.
  9. Calvo, Guillermo A. & Mendoza, Enrique G., 2000. "Rational contagion and the globalization of securities markets," Journal of International Economics, Elsevier, vol. 51(1), pages 79-113, June.
  10. Anastasia Guscina & Olivier Jeanne, 2006. "Government Debt in Emerging Market Countries: A New Data Set," IMF Working Papers 06/98, International Monetary Fund.
  11. 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.
  12. Barry Eichengreen & Ashoka Mody, 2000. "What Explains Changing Spreads on Emerging Market Debt?," NBER Chapters, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 107-136 National Bureau of Economic Research, Inc.
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Cited by:
  1. Alfredo Cuevas & Maria Gonzalez & Arnoldo López-Marmolejo & Davide Lombardo, 2008. "Pension Privatization and Country Risk," IMF Working Papers 08/195, International Monetary Fund.
  2. Dedu, Vasile & Mihai, Irina & Neagu, Florian, 2010. "Trends of the Contagion Risk in Sovereign Spreads for Emerging European Countries," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 265-279, July.
  3. Enrique Alberola & Luis Molina & Pedro del Río, 2012. "Boom-bust cycles, imbalances and discipline in Europe," Banco de España Working Papers 1220, Banco de España.
  4. Gilles Dufrénot & Valérie Mignon & Anne Péguin-Feissolle, 2010. "The Effects of the Subprime Crisis on the Latin American Financial Markets: an Empirical Assessment," Working Papers 2010-11, CEPII research center.
  5. Al-Sakka, Rasha & ap Gwilym, Owain, 2009. "Heterogeneity of sovereign rating migrations in emerging countries," Emerging Markets Review, Elsevier, vol. 10(2), pages 151-165, June.

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