EconPapers    
Economics at your fingertips  
 

Credit cycle dependent spread determinants in emerging sovereign debt markets

Christoph Riedel, Kannan Thuraisamy () and Niklas Wagner ()

Emerging Markets Review, 2013, vol. 17, issue C, 209-223

Abstract: We address credit cycle dependent sovereign credit risk determinants. In our model, the spread determinants' magnitude is conditional on an unobservable endogenous sovereign credit cycle as represented by the underlying state of a Markov regime switching process. Our explanatory variables are motivated in the tradition of structural credit risk models and include changes in asset prices, interest rates, implied market volatility, gold price changes and foreign exchange rates. We examine daily frequency variations of U.S. dollar denominated Eurobond credit spreads of four major Latin American sovereign bond issuers (Brazil, Colombia, Mexico and Venezuela) with liquid bond markets during March 2000 to June 2011. We find that spread determinants are statistically significant and consistent with theory, while their magnitude remarkably varies with the state of the credit cycle. Crisis states are characterized by high spread change uncertainty and high sensitivities with respect to the spread change determinants. We further document that not only changes of local currencies, but also changes of the Euro with respect to the U.S. dollar are significant spread drivers and argue that this is consistent with the sovereigns' ability to pay.

Keywords: Sovereign bonds; Sovereign spreads; Sovereign credit cycle; Structural models of credit risk; Regime switching; Sovereign debt crises (search for similar items in EconPapers)
JEL-codes: G15 G12 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1566014113000204
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ememar:v:17:y:2013:i:c:p:209-223

DOI: 10.1016/j.ememar.2013.03.002

Access Statistics for this article

Emerging Markets Review is currently edited by Jonathan A. Batten

More articles in Emerging Markets Review from Elsevier
Bibliographic data for series maintained by Nithya Sathishkumar ().

 
Page updated 2021-03-28
Handle: RePEc:eee:ememar:v:17:y:2013:i:c:p:209-223