Determinants of Sovereign Risk: Macroeconomic Fundamentals and the Pricing of Sovereign Debt

This paper investigates the effects of macroeconomic fundamentals on emerging market sovereign credit spreads. We find that the volatility of terms of trade in particular has a statistically and economically significant effect on spreads. This is robust to instrumenting terms of trade with a country...

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Bibliographic Details
Published inReview of Finance Vol. 14; no. 2; pp. 235 - 262
Main Authors Nosbusch, Yves, Hilscher, Jens
Format Journal Article
LanguageEnglish
Published Oxford Oxford University Press for European Finance Association 01.04.2010
Oxford University Press
SeriesReview of Finance
Subjects
Emerging markets
Macroeconomics
Risk assessment
Sovereign debt
Studies
Terms of trade
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Summary:This paper investigates the effects of macroeconomic fundamentals on emerging market sovereign credit spreads. We find that the volatility of terms of trade in particular has a statistically and economically significant effect on spreads. This is robust to instrumenting terms of trade with a country-specific commodity price index. Our measures of country fundamentals have substantial explanatory power, even controlling for global factors and credit ratings. We also estimate default probabilities in a hazard model and find that model implied spreads capture a significant part of the variation in observed spreads out-of-sample. The fit is better for lower credit quality borrowers. Copyright 2010, Oxford University Press.
ISSN:1572-3097
1875-824X
1573-692X
DOI:10.1093/rof/rfq005