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Do Macro-economic Fundamentals Price Sovereign CDS Spreads of Emerging Economies?


  • Plank, Thomas J.

    (University of Pennsylvania)


This paper studies the extent to which macro-economic variables govern the dynamics of emerging markets sovereign CDS spreads. I propose a structural model of sovereign credit risk based on observed exports, imports and international reserves. Using these macro fundamentals, I define a country's ability to pay as the maximum amount of foreign currency available for repayment of non-domestic debt. The joint dynamics of the ability to pay and a sovereign's outstanding external debt determine the level of country default risk and thus the CDS spreads. I implement the model for a sample of 6 emerging economies for a period covering the recent financial crisis. A calibrated version of the model captures the widening of sovereign spreads during the crisis and provides a good _t for the time-series dynamics of CDS spreads. Lastly, I use the model to measure the market-implied level of country liabilities. On average, the value of implied external debt is 13% larger than the reported level of debt.

Suggested Citation

  • Plank, Thomas J., 2010. "Do Macro-economic Fundamentals Price Sovereign CDS Spreads of Emerging Economies?," Working Papers 10-5, University of Pennsylvania, Wharton School, Weiss Center.
  • Handle: RePEc:ecl:upafin:10-5

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    References listed on IDEAS

    1. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Diebold, Francis X. & Li, Canlin & Yue, Vivian Z., 2008. "Global yield curve dynamics and interactions: A dynamic Nelson-Siegel approach," Journal of Econometrics, Elsevier, vol. 146(2), pages 351-363, October.
    3. Stambaugh, Robert F., 1997. "Analyzing investments whose histories differ in length," Journal of Financial Economics, Elsevier, vol. 45(3), pages 285-331, September.
    4. Patrick F. Rowland & Linda L. Tesar, 2004. "Multinationals and the Gains from International Diversification," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(4), pages 789-826, October.
    5. Jorion, Philippe, 1985. "International Portfolio Diversification with Estimation Risk," The Journal of Business, University of Chicago Press, vol. 58(3), pages 259-278, July.
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    7. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    8. Mark Britten-Jones, 1999. "The Sampling Error in Estimates of Mean-Variance Efficient Portfolio Weights," Journal of Finance, American Finance Association, vol. 54(2), pages 655-671, April.
    9. Lubos Pástor, 2000. "Portfolio Selection and Asset Pricing Models," Journal of Finance, American Finance Association, vol. 55(1), pages 179-223, February.
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    Cited by:

    1. Patrick Augustin, 2012. "Sovereign Credit Default Swap Premia," Working Papers 12-10, New York University, Leonard N. Stern School of Business, Department of Economics.
    2. repec:cii:cepiei:2015-q1-141-4 is not listed on IDEAS
    3. Augustin, Patrick & Subrahmanyam, Marti G. & Tang, Dragon Yongjun & Wang, Sarah Qian, 2014. "Credit Default Swaps: A Survey," Foundations and Trends(R) in Finance, now publishers, vol. 9(1-2), pages 1-196, December.
    4. Gonzalo Camba-Méndez & Konrad Kostrzewa & Anna Mospan & Dobromił Serwa, 2014. "Pricing sovereign credit risk of an emerging market," NBP Working Papers 189, Narodowy Bank Polski, Economic Research Department.
    5. Enrique Alberola & Luis Molina & Pedro del Río, 2012. "Boom-bust cycles, imbalances and discipline in Europe," Working Papers 1220, Banco de España;Working Papers Homepage.

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