Emerging market bond spreads: The role of global and domestic factors from 2002 to 2011 |
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Affiliation: | 1. Robeco, Investment Research, Coolsingel 120, 3011 AG Rotterdam, The Netherlands;2. Erasmus University Rotterdam, Erasmus School of Economics, Burgemeester Oudlaan 50, 3062 PA Rotterdam, The Netherlands;1. Department of Economics, University of Texas, Austin, United States;2. School of Economics, University of New South Wales, Australia;3. Department of Economics and Institute of Economic Research, Seoul National University, South Korea;1. University Paris 1 Panthéon Sorbonne, Centre d''Economie de la Sorbonne & Labex ReFi, France;2. University Paris Nanterre (Economix), Ecole Polytechnique, France & CIRANO, Canada;3. University Paris 1 Panthéon Sorbonne, Centre d''Economie de la Sorbonne, France;4. University of Jendouba, Economic Department, MASE Research Unit (Tunisian Engineering School of Statistics - ESSAI), Tunisia;5. University of Groningen, Netherlands & University of Saint Andrews, UK |
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Abstract: | We address the importance of external versus domestic conditions in determining emerging market bond (EMBI) spreads. Using principal components, we derive a measure of global risk aversion, which is shown to have a significant and, when interacted with a country's foreign debt to GNI ratio, nonlinear effect on these bond spreads. Our model, estimated using Pooled Mean Group techniques, which also incorporates country-specific variables (foreign debt, fiscal policy, debt servicing and political risk), is able to track developments in emerging market bond spreads over the period May 2002 to October 2011 quite well. From mid 2002 to mid 2007, the model suggests that just over two thirds of the decline in these spreads on average reflected improved fundamentals, with the rest due to easy credit conditions. During the 2008 crisis, virtually all of the run-up in emerging market spreads was due to the large increase in our measure of risk aversion. A model of the measure of risk aversion is also estimated, which identifies as its key drivers, the outlook for growth in the major OECD and large non-OECD economies as well as US credit supply conditions. |
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Keywords: | Emerging market bond spreads Risk aversion Principal components Pool mean group C33 F34 F47 G15 |
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