Accounting for sovereign tail risk in emerging economies: The role of global and domestic risk factors

Abstract

This paper evaluates the role of global and domestic risk factors in explaining sovereign tail risk for 18 emerging economies. Sovereign tail risk is defined as the likelihood of a sharp rise in sovereign credit risk. We find that both global and domestic risk factors contribute significantly to sovereign tail risk, with explanatory power increasing with the severity of tail risk in a non-linear fashion. Indeed, their contributions have become stronger following the global financial crisis. In particular, global liquidity conditions, commodity prices and economic growth are ranked as the major risk factors for sovereign tail risk among the EMEs.