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Common factors in emerging market spreads


  • Patrick McGuire
  • Martijn A Schrijvers


Emerging market sovereign bonds have become an important asset class for portfolio managers. A striking feature of the spreads on these bonds for different countries is that they tend to move in tandem over time. This paper investigates the extent to which these spreads can be explained by just one or two factors that are common across issuers. For a sample of 15 emerging market issuers, common factors account for an average of one third of the total daily variation in the various spreads. A single common factor explains approximately 80% of the common variation. This factor seems to reflect primarily changes in investors’ attitudes towards risk, as evidenced by its relatively high correlation with economic variables that track changes in risk premia.

Suggested Citation

  • Patrick McGuire & Martijn A Schrijvers, 2003. "Common factors in emerging market spreads," BIS Quarterly Review, Bank for International Settlements, December.
  • Handle: RePEc:bis:bisqtr:0312f

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    References listed on IDEAS

    1. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
    3. Trzcinka, Charles A, 1986. " On the Number of Factors in the Arbitrage Pricing Model," Journal of Finance, American Finance Association, vol. 41(2), pages 347-368, June.
    4. Connor, Gregory & Korajczyk, Robert A, 1993. " A Test for the Number of Factors in an Approximate Factor Model," Journal of Finance, American Finance Association, vol. 48(4), pages 1263-1291, September.
    5. Harvey, Campbell R, 1995. "Predictable Risk and Returns in Emerging Markets," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 773-816.
    6. Mei, Jianping, 1993. " A Semiautoregression Approach to the Arbitrage Pricing Theory," Journal of Finance, American Finance Association, vol. 48(2), pages 599-620, June.
    7. Farrell, James L, Jr, 1974. "Analyzing Covariation of Returns to Determine Homogeneous Stock Groupings," The Journal of Business, University of Chicago Press, vol. 47(2), pages 186-207, April.
    8. Brown, Stephen J, 1989. " The Number of Factors in Security Returns," Journal of Finance, American Finance Association, vol. 44(5), pages 1247-1262, December.
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets


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