A Microfounded Decomposition of Emerging Markets Sovereign Bond Spreads

Content Provider	Semantic Scholar
Author	Margaretic, Paula
Copyright Year	2008
Abstract	We implement a microfounded decomposition of sovereign bond spreads with data from Emerging Markets (EMs) over 15 years. We nd that the theoretically derived determinants of spreads are consistent with their recent evolution. We model trading strategies in a rational expectations model. Changes in country fundamentals and in investors’attitudes towards risk explain the evolution of EM spreads through time. Among the latter, we nd there is a liquidity premium, which is indeed priced in EM spreads. This is particularly relevant under periods of nancial distress. Using high frequency data, we nd evidence of strong comovement between EM spreads, as more than 50% of total variability is explained by a common factor. Episodes of nancial distress a¤ect spreads in two ways: i) they impact risk premia, through changing attitudes toward risk; ii) they have a level e¤ect on EM spreads, thus re‡ecting commonality in EM risk premia.
File Format	PDF HTM / HTML
Alternate Webpage(s)	http://www.finance-innovation.org/risk09/work/7629259.pdf
Language	English
Access Restriction	Open
Content Type	Text
Resource Type	Article