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Emerging Market Sovereign Spreads, Global Financial Conditions and US Macroeconomic News

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  • Fatih Özatay
  • Erdal Özmen
  • Gülbin Sahinbeyoglu

    () (Research and Monetary Policy Department, The Central Bank of Turkey, Ankara, Turkey.)

Abstract

This paper investigates the impact of global financial conditions, US macroeconomic news and domestic macroeconomic fundamentals on the evolution of Emerging Market Bond Index EMBI spreads for a panel of 18 emerging markets (EM) using daily data. To this end, we employ not only the conventional panel data estimation procedures, but also the recently developed common correlated effects panel mean group method which incorporates heterogeneity by allowing country-specific coefficients whilst accounting for the effects of common global shocks such as contagion. The results strongly suggest that the long-run evolution of EMBI spreads depends on external factors such as changes in global liquidity conditions, risk appetite and crises contagion. Domestic macroeconomic fundamentals, proxied by sovereign country ratings, are also found to be important in explaining the spreads. The results from panel equilibrium correction models suggest that EMBI spreads also respond substantially to US macroeconomic news, as well as changes in the Federal Reserve’s target interest rates. However, the magnitude and the sign of the effect of US macroeconomic news crucially depend on the state of the US economy, such as the presence of inflation dominance.

Suggested Citation

  • Fatih Özatay & Erdal Özmen & Gülbin Sahinbeyoglu, 2008. "Emerging Market Sovereign Spreads, Global Financial Conditions and US Macroeconomic News," Working Papers 400, Economic Research Forum, revised 03 Jan 2008.
  • Handle: RePEc:erg:wpaper:400
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    Cited by:

    1. Fatma Erdem & Erdal Özmen, 2015. "Exchange Rate Regimes and Business Cycles: An Empirical Investigation," Open Economies Review, Springer, vol. 26(5), pages 1041-1058, November.
    2. Comelli, Fabio, 2012. "Emerging market sovereign bond spreads: Estimation and back-testing," Emerging Markets Review, Elsevier, vol. 13(4), pages 598-625.
    3. Fatih Ozatay, 2008. "Expansionary Fiscal Consolidations: New Evidence from Turkey," Working Papers 0805, TOBB University of Economics and Technology, Department of Economics.
    4. Geert Bekaert & Campbell R Harvey & Christian T Lundblad & Stephan Siegel, 2014. "Political risk spreads," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 45(4), pages 471-493, May.
    5. Duygu Yolcu Karadam & Erdal Özmen, 2016. "Real Exchange Rates and Growth," ERC Working Papers 1609, ERC - Economic Research Center, Middle East Technical University, revised Sep 2016.
    6. Kennedy, Mike & Palerm, Angel, 2014. "Emerging market bond spreads: The role of global and domestic factors from 2002 to 2011," Journal of International Money and Finance, Elsevier, vol. 43(C), pages 70-87.
    7. Luca A Ricci & Marcos Chamon & Yuanyan S Zhang, 2011. "Country Insurance Using Financial Instruments," IMF Working Papers 11/169, International Monetary Fund.
    8. Özatay, Fatih & Özmen, Erdal & Sahinbeyoglu, Gülbin, 2009. "Emerging market sovereign spreads, global financial conditions and U.S. macroeconomic news," Economic Modelling, Elsevier, vol. 26(2), pages 526-531, March.
    9. Westerlund, Joakim & Thuraisamy, Kannan, 2016. "Panel multi-predictor test procedures with an application to emerging market sovereign risk," Emerging Markets Review, Elsevier, vol. 28(C), pages 44-60.
    10. Brana, Sophie & Lahet, Delphine, 2009. "Les déterminants des entrées de capitaux en Asie : quel rôle pour les stratégies de carry trade?," L'Actualité Economique, Société Canadienne de Science Economique, vol. 85(3), pages 283-302, septembre.
    11. Sanjeev Gupta & Amine Mati & Emanuele Baldacci, 2008. "Is it (Still) Mostly Fiscal? Determinants of Sovereign Spreads in Emerging Markets," IMF Working Papers 08/259, International Monetary Fund.
    12. Bonizzi, Bruno, 2017. "Institutional investors’ allocation to emerging markets: A panel approach to asset demand," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 47(C), pages 47-64.
    13. Hippler, William J. & Hassan, M. Kabir, 2015. "The impact of macroeconomic and financial stress on the U.S. financial sector," Journal of Financial Stability, Elsevier, vol. 21(C), pages 61-80.
    14. Fatih Ozatay, 2013. "Likely Candidates: Next BRICs? Turkey," Working Papers 1305, TOBB University of Economics and Technology, Department of Economics, revised Sep 2013.
    15. Bekaert, Geert & Harvey, Campbell R. & Lundblad, Christian T. & Siegel, Stephan, 2016. "Political risk and international valuation," Journal of Corporate Finance, Elsevier, vol. 37(C), pages 1-23.
    16. Henri Audigé, 2014. "Net flows to emerging markets’ funds and the U.S. monetary policy after the subprime crisis," EconomiX Working Papers 2014-23, University of Paris Nanterre, EconomiX.
    17. repec:eee:jimfin:v:79:y:2017:i:c:p:218-231 is not listed on IDEAS
    18. Kim, Suk-Joong & Salem, Leith & Wu, Eliza, 2015. "The role of macroeconomic news in sovereign CDS markets: Domestic and spillover news effects from the U.S., the Eurozone and China," Journal of Financial Stability, Elsevier, vol. 18(C), pages 208-224.
    19. Fernández-Rodríguez, Fernando & Gómez-Puig, Marta & Sosvilla-Rivero, Simón, 2016. "Using connectedness analysis to assess financial stress transmission in EMU sovereign bond market volatility," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 43(C), pages 126-145.
    20. Erdal Ozmen & Duygu Yolcu-Karadam, 2014. "Structural Change in Turkish External Trade: Evidence from BEC Sectors," ERC Working Papers 1413, ERC - Economic Research Center, Middle East Technical University, revised Nov 2014.
    21. Brana, Sophie & Lahet, Delphine, 2010. "Determinants of capital inflows into Asia: The relevance of contagion effects as push factors," Emerging Markets Review, Elsevier, vol. 11(3), pages 273-284, September.
    22. Juan Camilo Galvis Ciro & Helder Ferreira de Mendonça, 2016. "Inflation targeting credibility and sovereign risk: evidence from Colombia," Applied Economics Letters, Taylor & Francis Journals, vol. 23(14), pages 984-990, September.
    23. Özmen, Erdal & Doğanay Yaşar, Özge, 2016. "Emerging market sovereign bond spreads, credit ratings and global financial crisis," Economic Modelling, Elsevier, vol. 59(C), pages 93-101.
    24. repec:eee:finsta:v:33:y:2017:i:c:p:163-186 is not listed on IDEAS
    25. Martinez, Lisana B. & Terceño, Antonio & Teruel, Mercedes, 2013. "Sovereign bond spreads determinants in Latin American countries: Before and during the XXI financial crisis," Emerging Markets Review, Elsevier, vol. 17(C), pages 60-75.

    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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