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Sovereign Credit Risk in Latin America and Global Common Factors

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  • Manuel Agosin Trumper
  • Juan Díaz Maureira

Abstract

This paper studies the importance of global common factors in the evolution of sovereign credit risk in a group of emerging economies (15 countries in Latin America for which daily data are available on sovereign credit spreads and CDS quotations from the beginning of 2007 until February 2012). We arrive at three principal results. First, there is robust evidence for the existence of a common factor in the evolution of the two measurements of sovereign credit risk that we use. Second, the comovement between this common factor and our two measures of individual-country sovereign risk rose significantly after the bankruptcy of Lehman Brothers on September 15, 2008, widely regarded as the beginning of the most acute phase of the crisis. We interpret the results as evidence that changes in the availability of foreign capital to emerging economies is dependent less on developments that are internal to these economies than on international liquidity shocks and risk appetite, which in turn depend on global factors exogenous to the recipient economies. Third the long-run values of the measurements of sovereign risk conform to conventional notions of creditworthiness and are closely related to credit ratings. But even here, important credit events also affect long-run sovereign risk measurements.

Suggested Citation

  • Manuel Agosin Trumper & Juan Díaz Maureira, 2012. "Sovereign Credit Risk in Latin America and Global Common Factors," Working Papers wp365, University of Chile, Department of Economics.
  • Handle: RePEc:udc:wpaper:wp365
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    References listed on IDEAS

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    1. Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January.
    2. Darrell Duffie & Lasse Heje Pedersen & Kenneth J. Singleton, 2003. "Modeling Sovereign Yield Spreads: A Case Study of Russian Debt," Journal of Finance, American Finance Association, vol. 58(1), pages 119-159, February.
    3. Valentín Délano & Jorge Selaive, 2005. "Spreads Soberanos: Una Aproximación Factorial," Working Papers Central Bank of Chile 309, Central Bank of Chile.
    4. Guillermo A. Calvo & Alejandro Izquierdo & Luis-Fernando Mejía, 2008. "Systemic Sudden Stops: The Relevance Of Balance-Sheet Effects And Financial Integration," NBER Working Papers 14026, National Bureau of Economic Research, Inc.
    5. Bénédicte Vidaillet & V. D'Estaintot & P. Abécassis, 2005. "Introduction," Post-Print hal-00287137, HAL.
    6. James H. Stock & Mark W. Watson, 1989. "New Indexes of Coincident and Leading Economic Indicators," NBER Chapters,in: NBER Macroeconomics Annual 1989, Volume 4, pages 351-409 National Bureau of Economic Research, Inc.
    7. Watson, Mark W. & Engle, Robert F., 1983. "Alternative algorithms for the estimation of dynamic factor, mimic and varying coefficient regression models," Journal of Econometrics, Elsevier, vol. 23(3), pages 385-400, December.
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