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Article
Publication date: 4 December 2019

Saji Thazhugal Govindan Nair

This paper, using the model suggested by Cantor and Pecker (1996), aims to explore the relations between sovereign ratings and bond yield spreads in emerging markets.

Abstract

Purpose

This paper, using the model suggested by Cantor and Pecker (1996), aims to explore the relations between sovereign ratings and bond yield spreads in emerging markets.

Design/methodology/approach

The ordinary least square regression procedure administered on the most recent sovereign ratings of 46 countries demonstrates how the macroeconomic information embody in the sovereign rating scores predict their bond yield spreads relative to the yield on US Treasury bond.

Findings

The research finds that the assigned rating scores do not herald the complete elites of the macroeconomic conditions in emerging markets, and there is more incremental information in the publicly available macroeconomic variables, which is much useful in predicting bond yield spreads than that embedded into the sovereign ratings.

Practical implications

The outcomes of the research have strategic implications for global investors and policymakers. The use of credit rating scores along with the macroeconomic fundamentals in emerging economies produces better predictions than the benchmark predictions solely based on the rating scores suggested by the previous research.

Originality/value

This study is the first one to address the issues related to sovereign ratings and bond yield spread in developing and emerging markets using the most recent ratings during the period of the economic recoveries, following the global financial crisis of 2008.

Details

Journal of Financial Economic Policy, vol. 12 no. 2
Type: Research Article
ISSN: 1757-6385

Keywords

Book part
Publication date: 19 December 2012

Iuliana Matei and Angela Cheptea

Recently the world economy was confronted to the worst financial crisis since the great depression. This unprecedented crisis started in mid-2007 had a huge impact on the European…

Abstract

Recently the world economy was confronted to the worst financial crisis since the great depression. This unprecedented crisis started in mid-2007 had a huge impact on the European government bond market. But what are the main drivers of this “perfect storm” that since 2009 affects EU government bond market as well? To answer this question, we propose an empirical study of the determinants of the sovereign bond spreads of EU countries with respect to Germany during the period 2003–2010. Technically, we address two main questions. First, we ask what share of the change in sovereign bond spreads is explained by changes in the fundamentals, liquidity, and market risks. Second, we distinguish between EU member states within and outside the Euro area and question whether long-term determinants of spreads affect EU members uniformly. To these ends, we employ panel data techniques in a regression model where spreads to Germany (with virtually no default risk) are explained by set of traditional variables and a number of policy variables. Results reveal that large fiscal deficits and public debt as well as political risks and to a lesser extent the liquidity are likely to put substantial upward pressures on sovereign bond yields in many advanced European economies.

Details

Essays in Honor of Jerry Hausman
Type: Book
ISBN: 978-1-78190-308-7

Keywords

Article
Publication date: 8 October 2018

Gonzalo Gomez-Bengoechea and Alfredo Arahuetes

This paper aims to provide an empirical analysis of the macroeconomic determinants of sovereign bond yield spreads in the Eurozone from 2000 until August 2012, when the Outright…

Abstract

Purpose

This paper aims to provide an empirical analysis of the macroeconomic determinants of sovereign bond yield spreads in the Eurozone from 2000 until August 2012, when the Outright Monetary Transactions programme was launched.

Design/methodology/approach

The authors constructed an unbalanced panel with quarterly data from 2000 Q1 to 2012 Q2 for the 12 Eurozone countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Luxembourg, Italy, The Netherlands, Portugal and Spain. The authors propose a model that explains spreads through the main categories of variables observed in the literature. The relationship between variables is analysed using ordinary least squares and quantile regressions. As discussed by the authors, quantile regressions provide a more precise estimation, given the huge heterogeneity across counties that can be observed in the Eurozone.

Findings

Results show that the relationship between sovereign risk and macroeconomic fundamentals is affected by a strong country sentiment effect. The impact of country sentiment on sovereign risk is larger for those countries that were already experiencing higher spreads. Regardless the impact that European Central Bank’s (ECB) intervention had on sovereign risk from 2012, quantile regression results suggest that policy recommendations and goals should be adapted to each country’s market perception.

Originality/value

The results obtained improve on previous findings on this topic (De Grauwe and Ji, 2012) in two ways. First, they show that even introducing every category of determinants found in the literature in the main specification, fundamentals can only partially explain the evolution of sovereign risk in the Eurozone. Second, they find there is a country-sentiment effect that affects the relationship between macroeconomic indicators and sovereign risk. Furthermore, the paper finds that the country-sentiment effect is larger for countries facing high spreads.

Details

Journal of Financial Economic Policy, vol. 11 no. 1
Type: Research Article
ISSN: 1757-6385

Keywords

Article
Publication date: 21 August 2017

Mariya Gubareva and Maria Rosa Borges

The purpose of this paper is to study connections between interest rate risk and credit risk and investigate the inter-risk diversification benefit due to the joint consideration…

1373

Abstract

Purpose

The purpose of this paper is to study connections between interest rate risk and credit risk and investigate the inter-risk diversification benefit due to the joint consideration of these risks in the banking book containing sovereign debt.

Design/methodology/approach

The paper develops the historical derivative-based value at risk (VaR) for assessing the downside risk of a sovereign debt portfolio through the integrated treatment of interest rate and credit risks. The credit default swaps spreads and the fixed-leg rates of interest rate swap are used as proxies for credit risk and interest rate risk, respectively.

Findings

The proposed methodology is applied to the decade-long history of emerging markets sovereign debt. The empirical analysis demonstrates that the diversified VaR benefits from imperfect correlation between the risk factors. Sovereign risks of non-core emu states and oil producing countries are discussed through the prism of VaR metrics.

Practical implications

The proposed approach offers a clue for improving risk management in regards to banking books containing government bonds. It could be applied to access the riskiness of investment portfolios containing the wider spectrum of assets beyond the sovereign debt. The approach represents a useful tool for investigating interest rate and credit risk interrelation.

Originality/value

The proposed enhancement of the traditional historical VaR is twofold: usage of derivative instruments’ quotes and simultaneous consideration of the interest rate and credit risk factors to construct the hypothetical liquidity-free bond yield, which allows to distil liquidity premium.

Details

The Journal of Risk Finance, vol. 18 no. 4
Type: Research Article
ISSN: 1526-5943

Keywords

Book part
Publication date: 16 February 2006

Patrick McGuire and Martijn Schrijvers

The growth in euro-denominated bond debt issued by emerging market sovereigns picked up considerably after the Asian currency crises. However, while many emerging market…

Abstract

The growth in euro-denominated bond debt issued by emerging market sovereigns picked up considerably after the Asian currency crises. However, while many emerging market governments now have outstanding euro-denominated issues, the market for this debt remains considerably smaller and less liquid than its US dollar counterpart. This has implications for both investors and sovereigns as they try to balance liquidity and cost of capital considerations against portfolio diversification and exchange rate movements. Broadly speaking, spreads on emerging market bonds across countries tend to move in tandem over time. This chapter takes an introductory look at the market for euro-denominated sovereign debt, and investigates the degree to which spreads on euro-denominated emerging market sovereign debt react to common forces. Following a similar analysis of the US dollar market in McGuire and Schrijvers (2003) (hereafter MS2003), we use principal factor analysis to determine the number of common factors that drive movements in spreads, and then seek to assign meaning to these factors through simple correlations with economic variables.

Details

Emerging European Financial Markets: Independence and Integration Post-Enlargement
Type: Book
ISBN: 978-0-76231-264-1

Article
Publication date: 9 January 2017

M. Teresa Sorrosal-Forradellas, Lisana B. Martinez and Antonio Terceño

The last great financial crisis which arose in the middle of 2007 in the USA produced contagion effects over others economies. The purpose of this paper is focused on analyzing…

Abstract

Purpose

The last great financial crisis which arose in the middle of 2007 in the USA produced contagion effects over others economies. The purpose of this paper is focused on analyzing the evolution of a set of economic variables of 17 European countries since 1991 until 2013. Sovereign bond spreads are also considered to compare the incidence of the financial crisis over the economies considering macroeconomics fundamentals and fixed bonds.

Design/methodology/approach

Self-organizing maps (SOMs) are used to achieve the purpose of the research. With this methodology, it is possible to analyze the evolution of the macroeconomic fundamentals of each country, obtaining particular and general conclusions according to the position of each country in the SOM. Moreover, the countries are compared between them and with its respective sovereign bond spreads level for each year of analysis.

Findings

The impact of the crisis is different between the countries was analyzed. Belonging to the European Monetary Union is an interesting characteristic of some of the most affect economies.

Research limitations/implications

This research presents wide implications for the economies to control the most vulnerable economic variables in front of financial crisis to prevent the contagion effect. The inclusion of more economic variables and countries could enhance the study.

Originality/value

This research analyzes the relationship between macroeconomic variables and sovereign bond spreads using an infrequent methodology. The results obtained are valuable because they highlight how the present crisis has differently affected the European countries.

Details

Kybernetes, vol. 46 no. 1
Type: Research Article
ISSN: 0368-492X

Keywords

Open Access
Article
Publication date: 16 February 2022

Amir Saadaoui, Anis Elammari and Mohamed Kriaa

This study examines the effect of the informational content of local credit rating announcements in emerging markets on the liquidity of their bond markets. This study analyses…

2351

Abstract

Purpose

This study examines the effect of the informational content of local credit rating announcements in emerging markets on the liquidity of their bond markets. This study analyses the liquidity of bonds in various emerging bond markets using a sample of nine countries: Argentina, Mexico, Peru, Hungary, Poland, Spain, Turkey, Hong Kong and Greece. The sample includes daily data on sovereign bonds that go from July 2009 to July 2017. The main focus is on the period before and after the sovereign debt crisis. This study notes that the bond liquidity is affected due to the sign of the rating granted by the rating agencies for each country.

Design/methodology/approach

This study aims to question the sources of liquidity problem of sovereign bonds issued by the emerging countries. The study’s database consists of daily data of all nine emerging countries for the period from July 2009 to July 2017. Panel data were collected from the Datastream database.

Findings

This study first directly tests the information content of bond ratings announcements and their effect on bond market liquidity. Next, the impact of rating changes on sovereign bond liquidity around the rating announcements is studied. Rating changes can affect sovereign bond's price, trading and liquidity around the announcement date. In particular the rating changes that move the bonds out of the investment grade category can elicit selling pressure or even fire sale of the fallen angels.

Originality/value

This research aims to present data on the prices of sovereign bonds that react to changes in credit rating by studying the price movements around the announcement of changes in credit rating. The literature is very rich in studies on credit rating changes on stocks and corporate bonds, but this study is perhaps the first attempt on sovereign bonds.

Details

Journal of Economics, Finance and Administrative Science, vol. 27 no. 53
Type: Research Article
ISSN: 2218-0648

Keywords

Article
Publication date: 21 November 2014

Christina E. Bannier, Thomas Heidorn and Heinz-Dieter Vogel

This paper aims to provide an overview of the market for corporate and sovereign credit default swaps (CDS), with particular focus on Europe. It studies whether the subprime…

Abstract

Purpose

This paper aims to provide an overview of the market for corporate and sovereign credit default swaps (CDS), with particular focus on Europe. It studies whether the subprime crisis of 2007/2008 and, particularly, the European debt crisis 2009/2010 led to a differential development on corporate and sovereign CDS markets and investigates the primary use (speculative risk-trading or risk-hedging) of the two markets in recent years.

Design/methodology/approach

The authors use aggregate market data on the size of the respective markets and on the structure of market participants and their changes over time to assess the main research question. They enhance existing data from public sources such as the Bank for International Settlements and Depository Trust and Clearing Corporation with their own statistics on European sovereign CDS and combine their conclusions with observations regarding standardisation efforts and regulatory changes in the CDS market.

Findings

The authors show that after the subprime crisis 2007/2008 and the European debt crisis 2009/2010, the corporate and sovereign CDS markets developed quite differently. They provide evidence that since mid-2010, market participants started to use the sovereign CDS market more strongly for speculative purposes than for risk-hedging. This shows both in the shift of risk-quality of sovereign CDS contracts and in the changing structure of market participants. The ongoing standardisation and regulation in the CDS market – leading to further increases in transparency and reductions in transaction costs – may be expected to trigger a similar change also for corporate CDS.

Originality/value

Based on a broad variety of market infrastructure data, the authors show a diverging development of corporate and sovereign CDS markets in Europe in recent years. Particularly the sovereign CDS market appears to have shifted from a risk-hedging instrument to being used more strongly for speculative risk-trading. The authors combine their findings with recent regulatory action and market standardisation schemes and draw conclusions for the future development of CDS markets.

Details

The Journal of Risk Finance, vol. 15 no. 5
Type: Research Article
ISSN: 1526-5943

Keywords

Article
Publication date: 6 June 2016

Erwin Hansen and Jennifer Zegarra

The purpose of this paper is to explore the relationship between six different dimensions of political risk in a country and its spread for a sample of 12 Latin American countries.

Abstract

Purpose

The purpose of this paper is to explore the relationship between six different dimensions of political risk in a country and its spread for a sample of 12 Latin American countries.

Design/methodology/approach

The methodology applied consists of panel estimators with fixed effects. In addition, a panel data model with instrumental variables is considered to tackle with potential problems of endogeneity in the model.

Findings

The results show there is a strong positive relationship between political risk and sovereign spread in Latin America, i.e., greater political risk is associated with greater sovereign spread. This effect is particularly significant when the political risk is associated with a weak rule of law or low-quality regulation in the country.

Research limitations/implications

The main limitation of this study concerns the potential risks of endogeneity which might exist between sovereign risk and political risk measures, which may not have been completely eliminated with the econometric methodology used.

Originality/value

This paper contributes to the literature of sovereign risk by studying the dimension of political risk in detail. Specifically, six dimensions of political risk are studied. Additionally, it provides empirical evidence, including the 2008 financial crisis period, regarding the determinants of spreads on Latin American economies.

Propósito

En este trabajo se estudia la relación existente entre 6 diferentes dimensiones de riesgo político de un país y su spread soberano para una muestra de 12 países latinoamericanos.

Diseño/metodología/enfoque

La metodología utilizada corresponde a estimadores de panel con efectos fijos. Además, se considera un modelo de panel con variable instrumental para lidiar con posibles problemas de endogeneidad en el modelo.

Recomendaciones

Los resultados muestran que existe una fuerte relación positiva entre riesgo político y spread soberanos en América Latina, es decir, mayor riesgo político está asociado a mayor spread soberano. Este efecto es particularmente significativo cuando el riesgo político está asociado a un Estado de Derecho débil o a una baja calidad regulatoria en el país.

limitaciones de la investigación

La principal limitación de este estudio son los potenciales riesgos de endogeneidad que pudieran existir entre las medidas de riesgo político y riesgo soberano, y que no hayan sido eliminadas completamente con la metodología econométrica utilizada.

La originalidad/valor

este trabajo contribuye a la literatura de riesgo soberano estudiando la dimensión de riesgo político en detalle. En particular, se consideran 6 posibles dimensiones del riesgo político. Además, provee evidencia empírica reciente, incluyendo el período de crisis financiera del 2008, respecto a los determinantes de spread en economías latinoamericanas.

Article
Publication date: 1 June 2010

Saurav Roychoudhury and Robert A. Lawson

The purpose of this paper is to show that economic policy impacts sovereign debt risk in addition to economic performance.

966

Abstract

Purpose

The purpose of this paper is to show that economic policy impacts sovereign debt risk in addition to economic performance.

Design/methodology/approach

Regression analysis was employed to determine the factors that contribute to sovereign bond ratings and bond spreads for a sample of 93 countries from 2000 to 2006.

Findings

After controlling for common factors like per capita gross domestic production, growth, and political regime, the results suggest that a two unit (or a 2.4 standard deviation) drop in the economic freedom index represents approximately a 50 percent higher cost of borrowing for a country.

Originality/value

The paper contributes to the empirical literature on sovereign credit risk by identifying factors found to be the most significant in determining sovereign credit ratings and bond spreads.

Details

Journal of Financial Economic Policy, vol. 2 no. 2
Type: Research Article
ISSN: 1757-6385

Keywords

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