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Sovereign Spreads: A Factorial Approach

  • Jorge Selaive C.
  • Valentín Délano T.

This paper explores and estimates idiosyncratic and global factors that affect the evolution of sovereign spreads in emerging economies, with an emphasis on the Chilean case, for the period from January 1998 to September 2005. We find that a small number of global factors explain a large part of the sovereign spreads’ variability. In line with certain differentiation of international investors toward investment-grade economies, global factors seem to account for a smaller proportion of the sovereign spreads’ variability in these economies. In addition, we find that the recent reduction in Chile’s country risk can be explained by the evolution of both the idiosyncratic factor determined in principle by robust macrofinancial fundamentals and—mainly—of the global factors associated with world growth projections.

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Article provided by Central Bank of Chile in its journal Economía Chilena.

Volume (Year): 9 (2006)
Issue (Month): 1 (April)
Pages: 49-67

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Handle: RePEc:chb:bcchec:v:9:y:2006:i:1:p:49-67
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  1. 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.
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  8. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
  9. Jochen R. Andritzky & Geoffrey J. Bannister & Natalia T. Tamirisa, 2005. "The Impact of Macroeconomic Announcements on Emerging Market Bonds," IMF Working Papers 05/83, International Monetary Fund.
  10. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July.
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  12. Uribe, Martin & Yue, Vivian Z., 2006. "Country spreads and emerging countries: Who drives whom?," Journal of International Economics, Elsevier, vol. 69(1), pages 6-36, June.
  13. Mario Forni & Marc Hallin & Lucrezia Reichlin & Marco Lippi, 2000. "The generalised dynamic factor model: identification and estimation," ULB Institutional Repository 2013/10143, ULB -- Universite Libre de Bruxelles.
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  16. Patrick McGuire & Martijn A Schrijvers, 2003. "Common factors in emerging market spreads," BIS Quarterly Review, Bank for International Settlements, December.
  17. Pindyck, Robert S & Rotemberg, Julio J, 1993. "The Comovement of Stock Prices," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 1073-1104, November.
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