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Do country fundamentals explain emerging market bond spreads?

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  • Beck, Roland
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    Abstract

    This paper shows that emerging market eurobond spreads after the Asian crisis can be almost completely explained by market expectations about macroeconomic fundamentals and international interest rates. Contrary to the claim that emerging market bond spreads are driven by market variables such as stock market volatility in the developed countries, it is found that this did not play a significant role after the Asian crisis. Using panel data techniques, it is shown that the determinants of bond spreads can be divided into long-term structural variables and medium-term variables which explain month-to-month changes in bond spreads. As relevant medium-term variables, ''consensus forecasts'' of real GDP growth and inflation, and international interest rates are identified. The long-term structural factors do not explicitly enter the model and show up as fixed or random country-specific effects. These intercepts are highly correlated with the countries' credit rating. --

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    Bibliographic Info

    Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2001/02.

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    Date of creation: 2001
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    Handle: RePEc:zbw:cfswop:200102

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    Keywords: Emerging Markets; Bond Spreads;

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    Cited by:
    1. Tillmann, Peter, 2004. "External shocks and the non-linear dynamics of Brady bond spreads in a regime-switching VAR," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 14(5), pages 439-454, December.
    2. Elgin, Ceyhun & Uras, Burak R., 2013. "Public debt, sovereign default risk and shadow economy," Journal of Financial Stability, Elsevier, Elsevier, vol. 9(4), pages 628-640.
    3. Jens Hilscher & Yves Nosbusch, 2010. "Determinants of Sovereign Risk: Macroeconomic Fundamentals and the Pricing of Sovereign Debt," Review of Finance, European Finance Association, European Finance Association, vol. 14(2), pages 235-262.
    4. Christiane Nickel & Philipp Rother & Jan-Christoph Ruelke, 2011. "Fiscal variables and bond spreads - evidence from Eastern European countries and Turkey," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 21(17), pages 1291-1307.
    5. Ebner, André, 2009. "An empirical analysis on the determinants of CEE government bond spreads," Emerging Markets Review, Elsevier, Elsevier, vol. 10(2), pages 97-121, June.
    6. Lee, Hei Wai & Xie, Yan Alice & Yau, Jot, 2011. "The impact of sovereign risk on bond duration: Evidence from Asian sovereign bond markets," International Review of Economics & Finance, Elsevier, Elsevier, vol. 20(3), pages 441-451, June.
    7. Hans Genberg & Astrit Sulstarova, 2004. "Macroeconomic volatility, debt dynamics, and sovereign interest rate spreads," IHEID Working Papers, Economics Section, The Graduate Institute of International Studies 03-2004, Economics Section, The Graduate Institute of International Studies.
    8. Fendel, Ralf & Frenkel, Michael & Rülke, Jan-Christoph, 2011. "'Ex-ante' Taylor rules - Newly discovered evidence from the G7 countries," Journal of Macroeconomics, Elsevier, Elsevier, vol. 33(2), pages 224-232, June.
    9. Bleich, Dirk & Fendel, Ralf & Rülke, Jan-Christoph, 2012. "Inflation targeting makes the difference: Novel evidence on inflation stabilization," Journal of International Money and Finance, Elsevier, Elsevier, vol. 31(5), pages 1092-1105.
    10. Fendel, Ralf & Frenkel, Michael & Rülke, Jan-Christoph, 2011. ""Ex-ante" Taylor rules and expectation forming in emerging markets," Journal of Comparative Economics, Elsevier, vol. 39(2), pages 230-244, June.

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