Determinants of Sovereign Bond Spreads in Emerging Markets: Local Fundamentals and Global Factors vs. Ever-Changing Misalignments

July 10, 2013

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Balazs Csonto, and Iryna V. Ivaschenko Determinants of Sovereign Bond Spreads in Emerging Markets: Local Fundamentals and Global Factors vs. Ever-Changing Misalignments, (USA: International Monetary Fund, 2013) accessed December 22, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We analyze the relationship between global and country-specific factors and emerging market debt spreads from three different angles. First, we aim to disentangle the effect of global and country-specific developments, and find that while both country-specific and global developments are important in the long-run, global factors are main determinants of spreads in the short-run. Second, we investigate whether and how the strength of fundamentals is related to the sensitivity of spreads to global factors. Countries with stronger fundamentals tend to have lower sensitivity to changes in global risk aversion. Third, we decompose changes in spreads and analyze the behavior of explained and unexplained components over different periods. To do so, we break down fitted changes in spreads into the contribution of country-specific and global factors, as well as decompose changes in the residual into the correction of initial misalignment and an increase/decrease in misalignment. We find that changes in spreads follow periods of tightening/widening, which are well-explained by the model; and the dynamics of the components of the unexplained residual follow all the major developments that impact market sentiment. In particular, we find that in the periods of severe marketstress, such as during the intensive phase of the Eurozone debt crisis, global factors tend to drive changes in the spreads and the misalignment tends to increase in magnitude and its relative share in actual spreads.

Subject: Asset and liability management, Emerging and frontier financial markets, Financial crises, Financial markets, Financial services, International liquidity, Securities markets, Yield curve

Keywords: Asia and Pacific, Base period, Coefficient of VIX, Debt performance, EMBIG spread, Emerging and frontier financial markets, Emerging market, Emerging market bond, Emerging market country, Emerging market crisis episode, Emerging market debt, Error correction coefficient, Europe, Eurozone debt crisis, Financial risk, Global, International liquidity, Misalignment, Rating indicator, Securities markets, Short-term coefficient, Spreads, WP, Yield curve

Publication Details

Pages:

42
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2013/164
Stock No:

WPIEA2013164
ISBN:

9781475573206
ISSN:

1018-5941

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