Credit cycle dependent spread determinants in emerging sovereign debt markets

Riedel, Christoph, Thuraisamy, Kannan S. and Wagner, Niklas 2013, Credit cycle dependent spread determinants in emerging sovereign debt markets, Emerging markets review, vol. 17, pp. 209-223.

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Title Credit cycle dependent spread determinants in emerging sovereign debt markets
Author(s) Riedel, Christoph
Thuraisamy, Kannan S.
Wagner, Niklas
Journal name Emerging markets review
Volume number 17
Start page 209
End page 223
Total pages 15
Publisher Elsevier
Place of publication Amsterdam, The Netherlands
Publication date 2013-12
ISSN 1566-0141
Keyword(s) regime switching
sovereign bonds
sovereign credit cycle
sovereign debt crises
sovereign spreads
structural models of credit risk
Summary We address credit cycle dependent sovereign credit risk determinants. In our model, the spread determinants' magnitude is conditional on an unobservable endogenous sovereign credit cycle as represented by the underlying state of a Markov regime switching process. Our explanatory variables are motivated in the tradition of structural credit risk models and include changes in asset prices, interest rates, implied market volatility, gold price changes and foreign exchange rates. We examine daily frequency variations of U.S. dollar denominated Eurobond credit spreads of four major Latin American sovereign bond issuers (Brazil, Colombia, Mexico and Venezuela) with liquid bond markets during March 2000 to June 2011. We find that spread determinants are statistically significant and consistent with theory, while their magnitude remarkably varies with the state of the credit cycle. Crisis states are characterized by high spread change uncertainty and high sensitivities with respect to the spread change determinants. We further document that not only changes of local currencies, but also changes of the Euro with respect to the U.S. dollar are significant spread drivers and argue that this is consistent with the sovereigns' ability to pay.
Language eng
Field of Research 150202 Financial Econometrics
Socio Economic Objective 900102 Investment Services (excl. Superannuation)
HERDC Research category C1 Refereed article in a scholarly journal
Copyright notice ©2013, Elsevier
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Document type: Journal Article
Collection: School of Accounting, Economics and Finance
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