Credit spread drivers and cross-country connectedness: a study of emerging economies in Asia

Mohit Kumar and P. Krishna Prasanna

Journal of Asian Business and Economic Studies, 2024, vol. 31, issue 5, 338-350

Abstract: Purpose - While the existing literature lacks a holistic approach to determining credit spreads and is limited to mostly developed countries, this study investigates credit spread determinants and their cross-country connectedness in the context of four emerging economies in Asia by incorporating bonds, market risk, macroeconomic and global factors. Design/methodology/approach - This study utilizes principal component analysis for dimensionality reduction and variable representation. Furthermore, we employ the dynamic conditional correlation–generalized autoregressive conditional heteroskedasticity model to capture the cross-country credit spread connectedness between the variables. Findings - The findings indicate that market volatilities are the most significant drivers of credit spreads, while global factors play a moderating role. Furthermore, the results provide compelling evidence of cross-country credit spread connectedness, with China as the primary transmitter and Malaysia as the primary receiver among the selected emerging economies. Originality/value - This study addresses the limitations of previous research by extending the analysis beyond the commonly studied developed economies and focusing on emerging economies in Asia. It also employs a comprehensive approach to determine credit spread and explores cross-country credit spread connectedness in developing economies, thereby shedding light on financial risks and vulnerabilities within interconnected global financial systems.

Keywords: Credit spreads; Corporate bonds; Emerging countries; Cross-country connectedness; B22; D53; E43; F15; G12; G15 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jabesp:jabes-10-2023-0392

DOI: 10.1108/JABES-10-2023-0392

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