TY - JOUR
T1 - Fundamentals and Sovereign Risk of Emerging Markets
AU - Aizenman, Joshua
AU - Jinjarak, Yothin
AU - Park, Donghyun
N1 - Publisher Copyright:
© 2016 John Wiley & Sons Australia, Ltd.
PY - 2016/5/1
Y1 - 2016/5/1
N2 - We empirically assess the relative importance of various economic fundamentals in accounting for the sovereign credit default swap (CDS) spreads of emerging markets during 2004-2012, which encompasses the global financial crisis of 2008-2009. Inflation, state fragility, external debt and commodity terms of trade volatility were positively associated, while trade openness and a more favourable fiscal balance/GDP ratio were negatively associated with sovereign CDS spreads. Yet the relative importance of economic fundamentals in the pricing of sovereign risk varies over time. The key factors are trade openness and state fragility in the pre-crisis period, the external debt/GDP ratio and inflation in the crisis period, and inflation and the public debt/GDP ratio in the post-crisis period. Asian countries enjoy lower sovereign spreads than Latin American countries, and this gap widened during and after the crisis. Trade openness was the biggest factor behind Asia's lower sovereign spreads before the crisis, and inflation during and after the crisis. The results imply that external factors were paramount in pricing sovereign risk prior to the crisis, but internal factors associated with the capacity to adjust to adverse shocks gained prominence during and after the crisis.
AB - We empirically assess the relative importance of various economic fundamentals in accounting for the sovereign credit default swap (CDS) spreads of emerging markets during 2004-2012, which encompasses the global financial crisis of 2008-2009. Inflation, state fragility, external debt and commodity terms of trade volatility were positively associated, while trade openness and a more favourable fiscal balance/GDP ratio were negatively associated with sovereign CDS spreads. Yet the relative importance of economic fundamentals in the pricing of sovereign risk varies over time. The key factors are trade openness and state fragility in the pre-crisis period, the external debt/GDP ratio and inflation in the crisis period, and inflation and the public debt/GDP ratio in the post-crisis period. Asian countries enjoy lower sovereign spreads than Latin American countries, and this gap widened during and after the crisis. Trade openness was the biggest factor behind Asia's lower sovereign spreads before the crisis, and inflation during and after the crisis. The results imply that external factors were paramount in pricing sovereign risk prior to the crisis, but internal factors associated with the capacity to adjust to adverse shocks gained prominence during and after the crisis.
UR - http://www.scopus.com/inward/record.url?scp=84968813752&partnerID=8YFLogxK
U2 - 10.1111/1468-0106.12160
DO - 10.1111/1468-0106.12160
M3 - Article
AN - SCOPUS:84968813752
SN - 1361-374X
VL - 21
SP - 151
EP - 177
JO - Pacific Economic Review
JF - Pacific Economic Review
IS - 2
ER -