Identifying risks in emerging market sovereign and corporate bond spreads

Gabriele Zinna

No 430, Bank of England working papers from Bank of England

Abstract: This study investigates the systematic risk factors driving emerging market (EM) credit risk by jointly modelling sovereign and corporate credit spreads at a global level. We use a multi-regional Bayesian panel VAR model, with time-varying betas and multivariate stochastic volatility. This model allows us to decompose credit spreads and to build indicators of EM risks. We find that indices of EM sovereign and corporate credit spreads differ because of their specific reactions to global risk factors. Following the failure of Lehman Brothers, EM sovereign spreads ‘decoupled’ from the US corporate market. In contrast, EM corporate bond spreads widened in response to higher US corporate default risk. We also find that the response of sovereign bond spreads to the VIX was short-lived. However, both EM sovereign and corporate bond spreads widened in flight-to-liquidity episodes, as proxied by the OIS-Treasury spread. Overall, the model is capable of generating other interesting results about the comovement of sovereign and corporate spreads.

Keywords: Bayesian econometrics; factor models; emerging markets; credit spreads (search for similar items in EconPapers)
JEL-codes: F31 F34 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2011-07-13
New Economics Papers: this item is included in nep-ban, nep-cba and nep-rmg
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Citations: View citations in EconPapers (2)

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Journal Article: Identifying risks in emerging market sovereign and corporate bond spreads (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0430

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