The role of macroeconomic variables in sovereign risk

Marcos Matsumura and José Valentim Vicente

No 196, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: We use a dynamic term structure model with default and observable factors to study the interaction between macro variables and the Brazilian sovereign yield curve. We also calculate the default probabilities implied from the estimated model and the impact of macro shocks on those probabilities. Our results indicate that the VIX is the most important macro factor affecting short-term bonds and default probabilities, while the American short-term rate is the most important factor affecting the long-term default probabilities. Regarding the domestic variables, only the slope of the local yield curve presents significant explanatory power for the sovereign rates and default probabilities.

Date: 2009-10
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Journal Article: The role of macroeconomic variables in sovereign risk (2010)
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