The sovereign spread in Asian emerging economies: The significance of external versus internal factors

Sanjay Banerji, Alexia Ventouri and Zilong Wang

Economic Modelling, 2014, vol. 36, issue C, 566-576

Abstract: This paper investigates the dynamic relations between external factors, domestic macroeconomic factors with sovereign spreads, debt to GDP ratio, etc. in Asian emerging countries. First, we develop a theoretical model that determines the equilibrium debt level, probability of default and sovereign spread and draw empirical implications. We then employ a Structural Vector Autoregression (SVAR) model to investigate empirically how the spread of sovereign debt is influenced over time by both external and domestic factors. The empirical results show that variations in sovereign spreads are mainly driven by external shocks, with the term structure of US interest rate and the global risk aversion having the most important role. The findings also indicate that shocks from the US have a direct effect on sovereign spread and an indirect effect via domestic macroeconomic fundamentals. Finally, the evidence produced validates the presence of some response patterns of sovereign spread to the external shocks.

Keywords: Bond spread; SVAR; Sovereign risk; Emerging market; Risk aversion (search for similar items in EconPapers)
JEL-codes: F34 F41 G15 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:36:y:2014:i:c:p:566-576

DOI: 10.1016/j.econmod.2013.09.040

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