Empirical determinants of emerging market economies' sovereign bond spreads
In this paper the empirical determinants of emerging market sovereign bond spreads are estimated, using a ragged-edge panel of JP Morgan EMBI and EMBI Global secondary market spreads and a set of common macro-prudential indicators. The panel is estimated using the pooled mean group technique of Pesaran, Shin and Smith. This is essentially a dynamic error correction model where cross-sectional coefficients are allowed to vary in the short run but are required to be homogeneous in the long run. It allows a separation of short-run dynamics and adjustment towards the equilibrium. The model is used to benchmark market spreads and assess whether sovereign risk was overpriced or underpriced during different periods over the past decade. The results suggest that a debtor country's fundamentals and external liquidity conditions are important determinants of market spreads. However, the diagnostic statistics also indicate that the market assessment of a country's creditworthiness is more broad based than that provided by the set of fundamentals included in the model. It is found that the generalised fall in sovereign spreads seen between 1995 and 1997 cannot be entirely explained in terms of improved fundamentals.
|Date of creation:||Nov 2003|
|Date of revision:|
|Contact details of provider:|| Postal: Bank of England, Threadneedle Street, London, EC2R 8AH|
Phone: +44 (0)171 601 4030
Fax: +44 (0)171 601 5196
Web page: http://www.bankofengland.co.uk/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-53, October.
- Eichengreen, Barry & Mody, Ashoka, 1998. "Interest Rates in the North and Capital Flows to the South: Is There a Missing Link?," International Finance, Wiley Blackwell, vol. 1(1), pages 35-57, October.
- Pesaran, M. Hashem & Smith, Ron, 1995.
"Estimating long-run relationships from dynamic heterogeneous panels,"
Journal of Econometrics,
Elsevier, vol. 68(1), pages 79-113, July.
- Pesaran, M.H. & Smith, R., 1992. "Estimating Long-Run Relationships From Dynamic Heterogeneous Panels," Cambridge Working Papers in Economics 9215, Faculty of Economics, University of Cambridge.
- Richard Cantor & Frank Packer, 1996.
"Determinants and impact of sovereign credit ratings,"
Economic Policy Review,
Federal Reserve Bank of New York, issue Oct, pages 37-53.
- Richard Cantor & Frank Packer, 1996. "Determinants and impacts of sovereign credit ratings," Research Paper 9608, Federal Reserve Bank of New York.
- Guillermo A. Calvo & Enrique G. Mendoza, 1996.
"Mexico's balance-of-payments crisis: a chronicle of death foretold,"
International Finance Discussion Papers
545, Board of Governors of the Federal Reserve System (U.S.).
- Calvo, Guillermo A. & Mendoza, Enrique G., 1996. "Mexico's balance-of-payments crisis: a chronicle of a death foretold," Journal of International Economics, Elsevier, vol. 41(3-4), pages 235-264, November.
- Eaton, Jonathan & Gersovitz, Mark, 1980. "LDC participation in international financial markets : Debt and reserves," Journal of Development Economics, Elsevier, vol. 7(1), pages 3-21, February.
- Merton, Robert C, 1974.
"On the Pricing of Corporate Debt: The Risk Structure of Interest Rates,"
Journal of Finance,
American Finance Association, vol. 29(2), pages 449-70, May.
- Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Mario Draghi & Francesco Giavazzi & Robert C. Merton, 2003. "Transparency, Risk Management and International Financial Fragility," NBER Working Papers 9806, National Bureau of Economic Research, Inc.
- Feder, Gershon & Just, Richard E., 1976.
"A Study of Debt Servicing Capacity Applying Logit Analysis,"
225630, University of California, Davis, Department of Agricultural and Resource Economics.
- Feder, Gershon & Just, Richard E., 1977. "A study of debt servicing capacity applying logit analysis," Journal of Development Economics, Elsevier, vol. 4(1), pages 25-38, February.
- Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Oxford University Press, vol. 48(2), pages 289-309.
- Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 228-48, April.
- Yongcheol Shin & Ron P Smith & Mohammad Hashem Pesaran, 1998. "Pooled Mean Group Estimation of Dynamic Heterogeneous Panels," ESE Discussion Papers 16, Edinburgh School of Economics, University of Edinburgh.
- 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.
- Giovanni Dell'Ariccia & Jeronimo Zettelmeyer & Isabel Schnabel, 2002. "Moral Hazard and International Crisis Lending; A Test," IMF Working Papers 02/181, International Monetary Fund.
- Haque, N. U. & Pesaran, M. H. & Sharma, Sunil, 1999.
"Neglected Heterogeneity and Dynamics in Cross-country Savings Regressions,"
Cambridge Working Papers in Economics
9904, Faculty of Economics, University of Cambridge.
- International Monetary Fund, 1999. "Neglected Heterogeneity and Dynamics in Cross-Country Savings Regressions," IMF Working Papers 99/128, International Monetary Fund.
- Baltagi, Badi H. & Griffin, James M., 1997. "Pooled estimators vs. their heterogeneous counterparts in the context of dynamic demand for gasoline," Journal of Econometrics, Elsevier, vol. 77(2), pages 303-327, April.
When requesting a correction, please mention this item's handle: RePEc:boe:boeewp:205. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Digital Media Team)
If references are entirely missing, you can add them using this form.