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Sovereign Spreads and Contagion Effect

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  • Álvaro García
  • Valentina Paredes

Abstract

This paper studies the existence of contagion in Chile, using data of the sovereign debt spread for the period 1999-2006. Although we found a strong degree of interdependence between the Chilean series and the rest of the region, we reject the hypothesis of contagion from Brazil to Chile for the period studied. We use a threshold model and find that the effect of EMBI Brazil in EMBI Chile is not constant. When EMBI Brazil is above 800 bp, its effect over EMBI Chile decreases. This indicates that there is no contagion effect. Instead, when Brazil is in a crisis, its effect over Chile is lower than in normal periods. This result gives us evidence to say that countries with strong fundamentals, like Chile, have a lower probability of responding to a negative shock in a neighbor country.

Suggested Citation

  • Álvaro García & Valentina Paredes, 2006. "Sovereign Spreads and Contagion Effect," Working Papers Central Bank of Chile 385, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:385
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    File URL: https://www.bcentral.cl/documents/33528/133326/DTBC_385.pdf
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    References listed on IDEAS

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    1. Bruce E. Hansen, 2000. "Sample Splitting and Threshold Estimation," Econometrica, Econometric Society, vol. 68(3), pages 575-604, May.
    2. Valentín Délano & Felipe Jaque, 2005. "Spreads Soberanos: ¿Diferencian los Inversionistas Internacionales entre Economías Emergentes?," Working Papers Central Bank of Chile 332, Central Bank of Chile.
    3. 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.
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