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Modelling sovereign credit spreads with international macro-factors: The case of Brazil 1998–2009

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  • Liu, Zhuoshi
  • Spencer, Peter

Abstract

This paper develops a macro-finance model of the Brazilian economy and its sovereign debt markets that allows for domestic and international macroeconomic influences as well as swings in investor confidence. It finds significant evidence of common trends in the US and Brazilian economies and bond markets as well as spillover effects from US inflation and business cycles to the Brazilian economy. The US Fed Funds rate influences Brazilian sovereign spreads, as do Brazilian inflation and policy rates. The Brazilian confidence factor dominates the behavior of the spreads during periods of crisis and we find that it also has a powerful effect on the level and volatility of macroeconomic variables. These results suggest that the macro-finance approach could throw light upon the behavior of other economies that are troubled by sovereign risk.

Suggested Citation

  • Liu, Zhuoshi & Spencer, Peter, 2013. "Modelling sovereign credit spreads with international macro-factors: The case of Brazil 1998–2009," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 241-256.
  • Handle: RePEc:eee:jbfina:v:37:y:2013:i:2:p:241-256
    DOI: 10.1016/j.jbankfin.2012.08.012
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    Citations

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    Cited by:

    1. Jeanneret, Alexandre & Souissi, Slim, 2016. "Sovereign defaults by currency denomination," Journal of International Money and Finance, Elsevier, vol. 60(C), pages 197-222.
    2. repec:eee:quaeco:v:66:y:2017:i:c:p:13-20 is not listed on IDEAS
    3. Patricia Crifo & Marc-Arthur Diaye & Rim Oueghlissi, 2014. "Measuring the effect of government ESG performance on sovereign borrowing cost," CIRANO Working Papers 2014s-37, CIRANO.
    4. repec:ebl:ecbull:eb-18-00975 is not listed on IDEAS

    More about this item

    Keywords

    Affine term structure model; Macro-finance; Sovereign credit spread; International spillover; Macroeconomic volatility;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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