Abstract
The objective of this paper is to describe the behavior of Brazilian sovereign risk from 1995 to 2005 and evaluate the influence of international financial crises on the Brazilian sovereign risk in this period. The influence of international financial crises on the sovereign risk is analysed by econometric methods. The sovereign risk can econometrically be modelled ad hoc by regressing on explaining variables like the IBOVESPA, the short-term interest rate SELIC, the Brazilian international reserves, the exchange rate to the US$ and the foreign portfolio investment flows in equity and fixed income. The first four variables are used to construct an exchange market pressure index to identify and measure periods of international financial crises and model their influence on the sovereign risk. Another model explains changes in the sovereign risk by the exchange market pressure index and the foreign portfolio investment flows equity and does fairly well in a dynamic forecast for the dependent variable Brazilian sovereign risk. Monthly data were used with the Granger causality test to identify lead/lag relations. The results show that the market variables are determined simultaneously, while the SELIC rate reacts with a certain short lag, showing that monetary policy reacts to the financial crises more than anticipates them. The Granger causality test was used also for daily data with the same result.
Highlights
Sovereign risk, focusing on the probability of a government defaulting on debt, plays an important role in literature and in the assessment and administration of risk in international transactions, as can be seen in Frenkel, Karman and Scholtens (2004).Sovereign risk is a specific concept of the broader term, country risk, measuring the economic and political stability of a country
In this paper the relation between the international financial crises and financial and macroeconomic variables was analyzed in the period from January 1995 to July 2005, emphasizing the variables: C-bond spread, stock market index IBOVESPA, short term interest rate SELIC, international reserves of Brazil, exchange rate R$/US$ and foreign portfolio capital flows in the segments of equity and fixed income
The variables representing the exchange market pressure, the exchange rate R$/US$, the IBOVESPA stock market index, the international reserves of Brazil and the short term interest rate SELIC show significant changes in periods of international financial crises, corroborating the hypotheses mentioned above
Summary
Sovereign risk, focusing on the probability of a government defaulting on debt, plays an important role in literature and in the assessment and administration of risk in international transactions, as can be seen in Frenkel, Karman and Scholtens (2004). In international transactions the assessment and administration of country risk is important for the strategies of international investment and the hedging of international positions by financial and nonfinancial corporations. The use of econometric methods, which are backward looking but open the possibility to establish lead/lag relations for the variables, is opening an horizon to create possible forward looking risk indicators, that are important for the assessment and administration of international risk by financial and non-financial corporations. The objective of this paper is to describe the behavior of Brazilian sovereign risk from 1995 to 2005, evaluate the influence of international financial crises on the Brazilian sovereign risk in this period (Mexico 1994/95, Southeast Asia 1997, Russia 1998, Brazil 1998/99, Argentina 2001/2 and Brazil 2002/3), and estimate lead/lag relationships between the Brazilian sovereign risk, other financial and macroeconomic indicators and the foreign portfolio investment flows entering and leaving Brazil in the period
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