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Determinants of Sovereign Risk: Macroeconomic Fundamentals and the Pricing of Sovereign Debt

  • Jens Hilscher
  • Yves Nosbusch

This paper investigates the effects of macroeconomic fundamentals on emerging market sovereign credit spreads. We find that the volatility of terms of trade in particular has a statistically and economically significant effect on spreads. This is robust to instrumenting terms of trade with a country-specific commodity price index. Our measures of country fundamentals have substantial explanatory power, even controlling for global factors and credit ratings. We also estimate default probabilities in a hazard model and find that model implied spreads capture a significant part of the variation in observed spreads out-of-sample. The fit is better for lower credit quality borrowers. Copyright 2010, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/rof/rfq005
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Article provided by European Finance Association in its journal Review of Finance.

Volume (Year): 14 (2010)
Issue (Month): 2 ()
Pages: 235-262

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Handle: RePEc:oup:revfin:v:14:y:2010:i:2:p:235-262
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