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Credit cycle dependent spread determinants in emerging sovereign debt markets
journal contribution
posted on 2013-12-01, 00:00 authored by C Riedel, Kannan ThuraisamyKannan Thuraisamy, N WagnerWe 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.
History
Journal
Emerging markets reviewVolume
17Pagination
209 - 223Publisher
ElsevierLocation
Amsterdam, The NetherlandsPublisher DOI
ISSN
1566-0141Language
engPublication classification
C1 Refereed article in a scholarly journalCopyright notice
2013, ElsevierUsage metrics
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