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Sovereign Spread in Emerging Markets: A Principal Component Analysis

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  • Mónica Fuentes
  • Sergio Godoy

Abstract

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.

Suggested Citation

  • Mónica Fuentes & Sergio Godoy, 2005. "Sovereign Spread in Emerging Markets: A Principal Component Analysis," Working Papers Central Bank of Chile 333, Central Bank of Chile.
  • Handle: RePEc:chb:bcchwp:333
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    References listed on IDEAS

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    4. Matthias Fengler & Wolfgang Härdle & Christophe Villa, 2003. "The Dynamics of Implied Volatilities: A Common Principal Components Approach," Review of Derivatives Research, Springer, vol. 6(3), pages 179-202, October.
    5. Cifarelli, Giulio & Paladino, Giovanna, 2006. "Volatility co-movements between emerging sovereign bonds: Is there segmentation between geographical areas?," Global Finance Journal, Elsevier, vol. 16(3), pages 245-263, March.
    6. Valentín Délano & Jorge Selaive, 2005. "Spreads Soberanos: Una Aproximación Factorial," Working Papers Central Bank of Chile 309, Central Bank of Chile.
    7. Cipollini, A. & Kapetanios, G., 2008. "A stochastic variance factor model for large datasets and an application to S&P data," Economics Letters, Elsevier, vol. 100(1), pages 130-134, July.
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    Cited by:

    1. Álvaro García & Valentina Paredes, 2006. "Sovereign Spreads and Contagion Effect," Working Papers Central Bank of Chile 385, Central Bank of Chile.

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