Determinants of Sovereign Risk: Macroeconomic Fundamentals and the Pricing of Sovereign Debt

Jens Hilscher and Yves Nosbusch

Review of Finance, 2010, vol. 14, issue 2, 235-262

Abstract: This paper investigates the effects of macroeconomic fundamentals on emerging market sovereign credit spreads. We find that the volatility of terms of trade in particular has a statistically and economically significant effect on spreads. This is robust to instrumenting terms of trade with a country-specific commodity price index. Our measures of country fundamentals have substantial explanatory power, even controlling for global factors and credit ratings. We also estimate default probabilities in a hazard model and find that model implied spreads capture a significant part of the variation in observed spreads out-of-sample. The fit is better for lower credit quality borrowers. Copyright 2010, Oxford University Press.

Date: 2010
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Working Paper: Determinants of Sovereign Risk: Macroeconomic Fundamentals and the Pricing of Sovereign Debt (2007)
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