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Emerging Market Sovereign Spreads, Global Financial Conditions and U.S. Macroeconomic News

Fatih Ozatay (), Erdal Ozmen () and Gülbin Şahinbeyoğlu

No 707, ERC Working Papers from ERC - Economic Research Center, Middle East Technical University

Abstract: This paper investigates the impact of global financial conditions, US macroeconomic news and domestic macroeconomic fundamentals on the evolution of EMBI spreads for a panel of 18 emerging market (EM) countries using daily data. To this end, we employ not only the conventional panel data estimation procedures but also the recently developed common correlated effects panel mean group method which incorporates heterogeneity by allowing country-specific coefficients whilst accounting for the effects of common global shocks such as contagion. The results strongly suggest that the long-run evolution of EMBI spreads depends on external factors such as changes in global liquidity conditions, risk appetite and crises contagion. Domestic macroeconomic fundamentals proxied by sovereign country ratings are also found to be important in explaining the spreads. The results from panel equilibrium correction models suggest that EMBI spreads respond substantially also to US macroeconomic news and changes in the Federal Reserve’s target interest rates. The magnitude and the sign of the effect of US macroeconomic news, however, crucially depend on the state of the US economy, such as the presence of an inflation dominance.

Keywords: Bond spreads; Emerging markets; Macroeconomic news (search for similar items in EconPapers)
JEL-codes: E43 E58 F36 G14 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-mac
Date: 2007-12, Revised 2007-12
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http://erc.metu.edu.tr/en/system/files/menu/series07/0707.pdf First version, 2007 (application/pdf)

Related works:
Journal Article: Emerging market sovereign spreads, global financial conditions and U.S. macroeconomic news (2009) Downloads
Working Paper: Emerging Market Sovereign Spreads, Global Financial Conditions and US Macroeconomic News (2008) Downloads
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