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Frontier markets sovereign risk: New evidence from spatial econometric models

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  • Telila, Henok Fasil

Abstract

This paper considers spatial linkages of bilateral trade, financial correlation, and bilateral distance to study the macroeconomic determinants of sovereign risk for frontier markets. It applies (Shi and Lee, 2017) dynamic spatial Durbin model with interactive fixed effects. Analysis confirms the existence of spillover effects stemming from the explanatory variables’ movement towards the Credit default swaps (CDSs) premium of itself and neighboring countries. Bilateral distance and trade are the most significant spatial linkages. All macroeconomics except reserves impact CDS spreads directly and through feedback effects. Spatial dependence strengthens during recessions. Findings suggest policymakers should account for regional contagion channels that transmit sovereign risk.

Suggested Citation

  • Telila, Henok Fasil, 2023. "Frontier markets sovereign risk: New evidence from spatial econometric models," Finance Research Letters, Elsevier, vol. 58(PD).
    • Handle: RePEc:eee:finlet:v:58:y:2023:i:pd:s1544612323010371
    DOI: 10.1016/j.frl.2023.104665
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    More about this item

    Keywords

    Sovereign CDS spreads; Sovereign risk; Frontier markets; Spillover and feedback effects; Dynamic spatial panel with interactive fixed-effects;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F30 - International Economics - - International Finance - - - General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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