Frontier markets sovereign risk: New evidence from spatial econometric models

Henok Fasil Telila

Finance Research Letters, 2023, vol. 58, issue PD

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.

Keywords: Sovereign CDS spreads; Sovereign risk; Frontier markets; Spillover and feedback effects; Dynamic spatial panel with interactive fixed-effects (search for similar items in EconPapers)
JEL-codes: C21 C23 C58 F30 F37 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:58:y:2023:i:pd:s1544612323010371

DOI: 10.1016/j.frl.2023.104665

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