Accounting for sovereign tail risk in emerging economies: The role of global and domestic risk factors |
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| Institution: | 1. School of International Business Administration, Shanghai University of Finance and Economics, China;2. Faculty of Business and Economics, The University of Hong Kong, Hong Kong;3. Economic Research Department, Federal Reserve Bank of Kansas City, United States;1. Department of Economics and Econometrics, University of Johannesburg, Auckland Park 2006, South Africa;2. LeBow College of Business, Drexel University, Philadelphia, PA, USA;3. IPAG Business School, Paris, France;4. Department of Economics, University of Pretoria, Pretoria 0002, South Africa;1. Colegio de Estudios Superiores de Administracion, Calle 35 No. 6-16, Bogota, Colombia;2. University of Sydney Business School, The University of Sydney, NSW 2006, Australia;1. Energy and Sustainable Development (ESD), Montpellier Business School, Montpellier, France;2. Department of Finance and Accounting, University of Tunis El Manar, Tunis, Tunisia;3. Department of Economics and Finance, College of Economics and Political Science, Sultan Qaboos University, Muscat, Oman;4. Lebow College of Business, Drexel University, Philadelphia, United States;5. Shaheed Zulfikar Ali Bhutto Institute of Science and Technology (SZABIST), Islamabad, Pakistan |
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| 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. |
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