Sovereign Spread in Emerging Markets: A Principal Component Analysis
We investigates the behavior of daily bond stripped spreads on sovereign bonds for 18 emerging market economies located in Asia, East Europe and Latin America from September 1997 to November 2002. In the emerging market world, financial crises are seen more often than not. An obvious question is whether these events, each associated with a particular country, spread to other countries, regardless of economic fundamentals at that specific point in time. That is, if the ‘simultaneous’ movements that we observe in spreads across emerging market economies are linked to economic fundamentals. We find that the correlation across countries is regionally dominated. Spreads from sovereigns with high savings rates, low indebtedness and good credit ratings are less likely to co-move with spreads where financial crises are being originated.
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