Emerging Market Sovereign Bond Spreads Research Articles

How do oil prices affect emerging market sovereign bond spreads?

This paper examines whether oil price changes have significant impacts on emerging market sovereign bond spreads. In particular, we focus on how different structural shocks to oil prices affect the bond spreads. Using monthly data for 15 emerging market countries from 1998 to 2019, we show evidence that shocks to oil supply play an insignificant role in determining the bond spreads. In contrast, oil-specific demand shocks have both statistically and economically significant impacts on emerging market sovereign bond spreads. Global aggregate demand shocks are of secondary importance. As oil-specific demand shocks are associated with financial market speculative activity, such activity may lead to search-for-yield behavior in emerging market bond markets, and thus reduce emerging market sovereign spreads.

Does transparency pay? Evidence from IMF data transparency policy reforms and emerging market sovereign bond spreads

Does an effort to enhance data transparency pay? We answer this question by analyzing the effect of the data transparency policy reforms, as reflected in subscriptions to the IMF’s Data Standards Initiatives, namely, the Special Data Dissemination Standard (SDDS) and the General Data Dissemination System (GDDS), on the spreads of emerging market sovereign bonds. Employing a short-run event study with daily data, we convincingly show that market participants react to the transparency reform news positively. We then measure its medium-term effect, which is more relevant for economic decisions. By showing that the reform decision is largely independent of a country’s macroeconomic development we mitigate endogeneity issues regarding a decision to adopt such reforms. On average, the adoption of the SDDS and GDDS lead to a 13% reduction in the spreads over one year, following such reforms. This finding is robust to various sensitivity tests, including careful consideration of overlapping events, controlling for additional variables, and a placebo test.

The Effects of Data Transparency Policy Reforms on Emerging Market Sovereign Bond Spreads

We find that data transparency policy reforms, reflected in subscriptions to the IMFi¯s Data Standards Initiatives (SDDS and GDDS), reduce the spreads of emerging market sovereign bonds. To overcome endogeneity issues regarding a countryi¯s decision to adopt such reforms, we first show that the reform decision is largely independent of its macroeconomic development. By using an event study, we find that subscriptions to the SDDS or GDDS leads to a 15 percent reduction in the spreads one year following such reforms. This finding is robust to various sensitivity tests, including careful consideration of the interdependence among the structural reforms.

The Effects of Data Transparency Policy Reforms on Emerging Market Sovereign Bond Spreads

We find that data transparency policy reforms, reflected in subscriptions to the IMF’s Data Standards Initiatives (SDDS and GDDS), reduce the spreads of emerging market sovereign bonds. To overcome endogeneity issues regarding a country’s decision to adopt such reforms, we first show that the reform decision is largely independent of its macroeconomic development. By using an event study, we find that subscriptions to the SDDS or GDDS leads to a 15 percent reduction in the spreads one year following such reforms. This finding is robust to various sensitivity tests, including careful consideration of the interdependence among the structural reforms.

Emerging market sovereign bond spreads, credit ratings and global financial crisis

This paper investigates the impacts of sovereign credit ratings and global financial conditions on the evolution of EMBI Global (EMBIG) spreads for a panel of 23 developing countries by using daily data for the period between 1998 and 2012. To this end, we employ not only the conventional panel estimation procedures, but also the recent methods tackling with either cross-sectional dependence stemming from common global shocks or a potential endogeneity. Our results suggest that credit ratings along with global financial conditions re the main determinants of EMBIG spreads. The determinants of EMBIG spreads are not invariant to speculative and investment grade episodes and transitions between them. The recent global crisis changed the determinants of EMBIG spreads and led to credit ratings' impact to converge between speculative and investment grade countries.

Emerging market sovereign bond spreads and shifts in global market sentiment

The paper studies how the relationship between emerging market sovereign bond spreads, economic fundamentals and global financial market conditions differs across three regimes of global market sentiment. Following the identification of periods characterized by low, medium and high volatility in financial markets, we analyze the behavior of spreads from three different angles. First, we demonstrate that the cross-country correlation of spreads increases in high-volatility regimes, implying that countries cannot fully decouple from developments in other emerging markets during periods of distress. Second, using the interactions of several domestic and global variables with the probabilities of each regime prevailing in a given period as the explanatory variables of spreads, the fixed effects panel estimation shows that while country-specific fundamentals are important determinants of spreads in each regime, the importance of global financial conditions increases in high-volatility periods. Third, we show that countries can benefit from stronger fundamentals in the form of lower exposure of their sovereign spreads to unfavorable regime shifts in global market sentiment.

Emerging market sovereign bond spreads: Estimation and back-testing

We estimate sovereign bond spreads of 28 emerging economies over the period January 1998–December 2011 and test the ability of the model in generating accurate in-sample predictions for bond spreads. The impact and significance of explanatory variables on spreads vary across regions and periods. During crisis times, good macroeconomic indicators are helpful in containing spreads, but less than in non-crisis times, possibly reflecting the impact of extra-economic forces on spreads when a financial crisis occurs. For some economies, in-sample predictions of the monthly changes in spreads obtained with rolling regression routines are more accurate than those obtained with random guessing.

Emerging Market Sovereign Bond Spreads: Estimation and Back-testing

We estimate sovereign bond spreads of 28 emerging economies over the period January 1998-December 2011 and test the ability of the model in generating accurate in-sample predictions for emerging economies bond spreads. The impact and significance of country-specific and global explanatory variables on bond spreads varies across regions, as well as economic periods. During crisis times, good macroeconomic fundamentals are helpful in containing bond spreads, but less than in non-crisis times, possibly reflecting the impact of extra-economic forces on bond spreads when a financial crisis occurs. For some emerging economies, in-sample predictions of the monthly changes in bond spreads obtained with rolling regression routines are significantly more accurate than forecasts obtained with a random walk. Rolling regression-based bond spread predictions appear to convey more information than those obtained with a linear prediction method. By contrast, bond spreads forecasts obtained with a linear prediction method are less accurate than those obtained with random guessing.

Resource Windfalls and Emerging Market Sovereign Bond Spreads: The Role of Political Institutions

The authors examine the effect that revenue windfalls from international commodity price booms have on sovereign bond spreads using panel data for 38 emerging market economies during the period 1997-2007. The main finding is that commodity price booms lead to a significant reduction in the sovereign bond spread in democracies, but to a significant increase in the spread in autocracies. To explain the finding, the authors show that, consistent with the political economy literature on the resource curse, revenue windfalls from international commodity price booms significantly increased real per capita gross domestic product (GDP) growth in democracies, while in autocracies GDP per capita growth decreased.

Has International Financial Co-Movement Changed?: Emerging Markets in the 2007-2009 Financial Crisis

Emerging market (EM) assets have historically been regarded as inherently risky and particularly vulnerable to international shocks that result in a general increase in investor risk perceptions. In this paper, we assess the ongoing relevance of this view by examining the linkages between EM and non-EM stock and bond markets in the past two decades, with a focus on how these relationships played out during the global financial crisis of 2007-2009. We evaluate how these linkages have evolved over the period 1992-2009, through statistical tests of whether the volatility of EM financial markets changed - either in their response to international shocks originating in advanced economy markets or in their independent fluctuations. We find that over the longer period EM bond and stock prices have on average moved in the same direction as the prices of non-EM risky assets, and this co-movement has persisted. However, these relationships have evolved somewhat over time. Both EM sensitivity to international shocks and EM-specific volatility in EM sovereign bond spreads appear to have decreased over time, consistent with the greater fundamental stability of EM economies and perhaps a reduced inclination by investors to sell off EM assets in response to a rise in risk perceptions. Somewhat in contrast, while an upward trend in co-variation between EM and non-EM stock prices suggests an increasing degree of global market integration, idiosyncratic volatility has declined, consistent with a diminished level of locally-driven risk in these markets. In addition, the response of EM asset prices to the latest financial crisis appears to be moderate in comparison to historical experience. This evidence may reflect reduced EM vulnerability to external shocks in general, which is consistent with some encouraging improvements in the underlying fundamentals of EM economies over the decade preceding the onset of the crisis.

Determinants of Emerging Market Sovereign Bond Spreads: Fundamentals vs Financial Stress

This paper analyses the determimants of emerging market sovereign bond spreads by examining the short and long-run effects of fundamental (macroeconomic) and temporary (financial market) factors on these spreads. During the current global financial and economic crisis, sovereign bond spreads widened dramatically for both developed and emerging market economies. This deterioration has widely been attributed to rapidly growing public debts and balance sheet risks. Our results indicate that in the long run, fundamentals are significant determinants of emerging market sovereign bond spreads, while in the short run, financial volatility is a more important determinant of sperads than fundamentals indicators.

Determinants of Emerging Market Sovereign Bond Spreads: Fundamentals Vs Financial Stress

This paper analyses the determimants of emerging market sovereign bond spreads by examining the short and long-run effects of fundamental (macroeconomic) and temporary (financial market) factors on these spreads. During the current global financial and economic crisis, sovereign bond spreads widened dramatically for both developed and emerging market economies. This deterioration has widely been attributed to rapidly growing public debts and balance sheet risks. Our results indicate that in the long run, fundamentals are significant determinants of emerging market sovereign bond spreads, while in the short run, financial volatility is a more important determinant of sperads than fundamentals indicators.

Resource Windfalls and Emerging Market Sovereign Bond Spreads: The Role of Political Institutions

We examine the effect that revenue windfalls from international commodity price shocks have on sovereign bond spreads using panel data for 30 emerging market economies during the period 1997-2007. Our main finding is that positive commodity price shocks lead to a significant reduction in the sovereign bond spread in democracies, but to a significant increase in the spread in autocracies. To explain our finding we show that, consistent with the political economy literature on the resource curse, revenue windfalls from international commodity price shocks significantly increased real per capita GDP growth in democracies, while in autocracies GDP per capita growth decreased.

Resource Windfalls and Emerging Market Sovereign Bond Spreads: The Role of Political Institutions

We examine the effect that revenue windfalls from international commodity price shocks have on sovereign bond spreads using panel data for 30 emerging market economies during the period 1997-2007. Our main finding is that positive commodity price shocks lead to a significant reduction in the sovereign bond spread in democracies, but to a significant increase in the spread in autocracies. To explain our finding we show that, consistent with the political economy literature on the resource curse, revenue windfalls from international commodity price shocks significantly increased real per capita GDP growth in democracies, while in autocracies GDP per capita growth decreased.

Credible privatization and market sentiment: Evidence from emerging bond markets

This paper investigates the link between privatization and emerging market sovereign bond spreads. We conjecture that the way privatization is implemented may help to build a favorable market sentiment by gradually building investor confidence, which should then lead to a lower required compensation for policy risk. Controlling for other determinants of sovereign bond spreads, we find that privatization proceeds do not affect spreads, while privatization progress and share issues reduce spreads.

Empirical Determinants of Emerging Market Economies' Sovereign Bond Spreads

This paper investigates the empirical determinants of emerging market sovereign bond spreads, using a ragged-edge panel of JP Morgan EMBI and EMBI Global secondary market spreads and a set of common macro-prudential indicators. The panel is estimated using the pooled mean group technique due to Pesaran, Shin and Smith (1999). This is essentially a dynamic error correction model where cross-sectional coefficients are allowed to vary in the short run but are required to be homogeneous in the long run. This allows a separation of short-run dynamics and adjustment towards the equilibrium. The model is used to benchmark market spreads and assess whether sovereign risk was 'overpriced' or 'underpriced' during different periods over the past decade. The results suggest that a debtor country's fundamentals and external liquidity conditions are important determinants of market spreads. However, the diagnostic statistics also indicate that the market assessment of a country's creditworthiness is more broad based than that provided by the set of fundamentals included in the model. We also find that the generalised fall in sovereign spreads seen between 1995 and 1997 cannot be entirely explained in terms of improved fundamentals.