Emerging Markets Spreads and Global Financial Conditions

Alessio Ciarlone (), Paolo Piselli () and Giorgio Trebeschi ()
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Alessio Ciarlone: Bank of Italy, International Relations
Paolo Piselli: Bank of Italy, International Relations
Giorgio Trebeschi: Bank of Italy, International Relations

No 637, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research Department

Abstract: In this article, we analyse how much of the reduction in emerging markets spreads can be ascribed to specific factors - linked to the improvement in the 'fundamentals' of a given country - rather than to common factors - linked to global liquidity conditions and agentsÂ’ degree of risk aversion. By means of factor analysis, we find that a single common factor is able to explain a large part of the co-variation in emerging market economies spreads observed in the last four years; on its turn, this common factor might be traced back mainly to financial markets volatility. Due to the particularly benign global financial conditions in recent years, spreads seem to have declined to levels lower than those warranted by improved fundamentals. As a consequence, EMEs do remain vulnerable to sudden shift in financial market conditions.

Keywords: emerging markets; spreads; factor analysis (search for similar items in EconPapers)
JEL-codes: C10 C22 F34 G15 (search for similar items in EconPapers)
Date: Written 2007-06
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