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Sovereign bond ratings and market spreads. a dynamic panel analysis


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  • Galati, Davide
  • Sitzia, Bruno


Abstract This paper applies a measure of country risk to determine the evolution of credit spreads on secondary market sovereign bonds issued by emerging countries. After the Mexican financial crisis in 1995, this market has been characterised by a sharp decline of spreads which, by mid-1997, brought them to a level which was thought not to adequately cover risk. The episode has been followed in successive years by a new increase of spreads, accompanied by high volatility in concomitance with the Asian and Russian crises. In order to tackle the issue of how preads are determined, we concentrate on sovereign risk as measured by spreads on Brady bonds and specify a dynamic panel model including seven countries that are large issuers of these instruments. The analysis reveals a significant effect for economic fundamentals, but we also found that spreads are significantly affected by shock factors: besides general financial crises, we isolated a role for commodity prices. We found an asymmetric effect for core countries interest rates, which signals the limited role for core rates in affecting the decline in spreads, that we instead attribute, besides a bettering of fundamentals, to a spreading of lobalisation. In the post ‘97 period we found spreads grossly in line with fundamentals but we have no specific explanation to offer for the occurrence of repeated financial crises save that a general recourse to the argument of nterdependence. We think that the analysis of contagion or interdependence problems that has recently attracted much attention obviously deserves further work and possibly a different econometric technique using data at a higher frequency than the monthly data employed in this study.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 8984.

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Date of creation: Feb 2000
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Handle: RePEc:pra:mprapa:8984

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Keywords: Brady bonds; bond spreads; sovereign ratings; emerging markets;

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  1. Miller, Marcus & Zhang, Lei, 2000. "Sovereign Liquidity Crises: The Strategic Case for a Payments Standstill," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 110(460), pages 335-62, January.
  2. Guillermo A. Calvo & Enrique G. Mendoza, 1999. "Regional Contagion and the Globalization of Securities Markets," NBER Working Papers 7153, National Bureau of Economic Research, Inc.
  3. International Monetary Fund, 1998. "Leading Indicators of Banking Crises," IMF Working Papers, International Monetary Fund 98/91, International Monetary Fund.
  4. Pesaran, H. & Smith, R. & Im, K.S., 1995. "Dynamic Linear Models for Heterogeneous Panels," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 9503, Faculty of Economics, University of Cambridge.
  5. Kristin Forbes & Roberto Rigobon, 1999. "No Contagion, Only Interdependence: Measuring Stock Market Co-movements," NBER Working Papers 7267, National Bureau of Economic Research, Inc.
  6. Helmut Reisen & Julia von Maltzan, 1999. "Boom and Bust and Sovereign Ratings," OECD Development Centre Working Papers 148, OECD Publishing.
  7. Richard Cantor & Frank Packer, 1996. "Determinants and impacts of sovereign credit ratings," Research Paper, Federal Reserve Bank of New York 9608, Federal Reserve Bank of New York.
  8. Judson, Ruth A. & Owen, Ann L., 1999. "Estimating dynamic panel data models: a guide for macroeconomists," Economics Letters, Elsevier, Elsevier, vol. 65(1), pages 9-15, October.
  9. Hong G. Min, 1998. "Determinants of emerging market bond spread : do economic fundamentals matter?," Policy Research Working Paper Series, The World Bank 1899, The World Bank.
  10. repec:cup:cbooks:9780521586412 is not listed on IDEAS
  11. Barry Eichengreen & Ashoka Mody, 2000. "What Explains Changing Spreads on Emerging Market Debt?," NBER Chapters, National Bureau of Economic Research, Inc, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 107-134 National Bureau of Economic Research, Inc.
  12. Erik Durbin & David Tat-Chee Ng, 1999. "Uncovering country risk in emerging market bond prices," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 639, Board of Governors of the Federal Reserve System (U.S.).
  13. Guillermo Larraín & Helmut Reisen & Julia von Maltzan, 1997. "Emerging Market Risk and Sovereign Credit Ratings," OECD Development Centre Working Papers 124, OECD Publishing.
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