Intra-market sovereign linkages of Latin American international bonds

This paper tests the intra-market dynamics in a regional setting using country specific international bonds differentiated only by maturity within individual markets in the Latin American region. We use 2001 Argentine default as a natural experiment in this study to examine how intra-market dynamics evolved in the presence of a credit event in the region. This paper argues that emerging market instruments have a stronger tendency to tie up with instruments within markets rather than across markets as found in the literature. The long-run equilibrium relationships tend to be stronger across instruments within each market and generate economically insignificant portfolio adjustment weights. Strong interaction across instruments within markets in terms of first order dependencies has important implications for market participants, practitioners and policy makers.