BALANCE SHEET EFFECTS AND THE COUNTRY RISK PREMIUM: AN EMPIRICAL INVESTIGATION

Alicia Garcia Herrero, Juan Carlos Berganza () and Roberto Chang

International Finance from University Library of Munich, Germany

Abstract: This paper investigates empirically whether there is a negative relationship between a country’s risk premium and the balance sheet effect, as implied by recent theories emphasizing financial imperfections. We find evidence that balance sheet effects, stemming from the increase in the external debt service after an unexpected real depreciation, significantly raise the risk premium. We also show that the increase in the risk premium is not due to the debt service as such. While the result holds for the whole sample, we show that it is mainly driven by those countries with the largest financial imperfections, as argued by imperfect capital market theories. Particularly large real depreciations also seem to be disproportionately important, meaning that the balance sheet effects may be strongest at times of economic crisis, when large devaluations occur.

Keywords: balance sheet effects; country risk premium; sovereign spreads (search for similar items in EconPapers)
JEL-codes: F3 F31 F34 (search for similar items in EconPapers)
Date: 2004-03-05
New Economics Papers: this item is included in nep-mac
Note: Type of Document - pdf; prepared on WIN 2000; to print on hp;
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Citations: View citations in EconPapers (23)

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Related works:
Journal Article: Balance sheet effects and the country risk premium: An empirical investigation (2004)
Working Paper: Balance sheet effects and the country risk premium: an empirical investigation (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpif:0403005

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