The Credit Spread Dynamics of Latin American Euro Issues in International Bond Markets
This paper investigates two important relationships in Latin American Eurobond markets: the determinants of credit spread changes using structural model and macroeconomic determinants and the underlying equilibrium dynamics when there is a default episode. We find four significant determinants of credit spread changes that drive the credit spreads: an asset and interest rate factor- consistent with structural models of credit spread pricing; the exchange rate- consistent with macroeconomic determinants; and the slope of the yield curve -consistent with business cycle effect. Also, an intra-regional analysis of sovereign yields reveals a shift in long-term equilibrium dynamics around the Argentine default on the 23rd of December 2001.
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