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The sovereign spread in Asian emerging economies: The significance of external versus internal factors

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  • Banerji, Sanjay
  • Ventouri, Alexia
  • Wang, Zilong

Abstract

This paper investigates the dynamic relations between external factors, domestic macroeconomic factors with sovereign spreads, debt to GDP ratio, etc. in Asian emerging countries. First, we develop a theoretical model that determines the equilibrium debt level, probability of default and sovereign spread and draw empirical implications. We then employ a Structural Vector Autoregression (SVAR) model to investigate empirically how the spread of sovereign debt is influenced over time by both external and domestic factors. The empirical results show that variations in sovereign spreads are mainly driven by external shocks, with the term structure of US interest rate and the global risk aversion having the most important role. The findings also indicate that shocks from the US have a direct effect on sovereign spread and an indirect effect via domestic macroeconomic fundamentals. Finally, the evidence produced validates the presence of some response patterns of sovereign spread to the external shocks.

Suggested Citation

  • Banerji, Sanjay & Ventouri, Alexia & Wang, Zilong, 2014. "The sovereign spread in Asian emerging economies: The significance of external versus internal factors," Economic Modelling, Elsevier, vol. 36(C), pages 566-576.
    • Handle: RePEc:eee:ecmode:v:36:y:2014:i:c:p:566-576
    DOI: 10.1016/j.econmod.2013.09.040
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    Cited by:

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    2. Debarsy, Nicolas & Dossougoin, Cyrille & Ertur, Cem & Gnabo, Jean-Yves, 2018. "Measuring sovereign risk spillovers and assessing the role of transmission channels: A spatial econometrics approach," Journal of Economic Dynamics and Control, Elsevier, vol. 87(C), pages 21-45.
    3. Gomez-Gonzalez, Jose E. & Valencia, Oscar M. & Sánchez, Gustavo A., 2022. "How fiscal rules can reduce sovereign debt default risk," Emerging Markets Review, Elsevier, vol. 50(C).
    4. Jose E. Gomez-Gonzalez & Jorge M. Uribe & Oscar M. Valencia, 2023. "Sovereign Risk and Economic Complexity: Machine Learning Insights on Causality and Prediction," IREA Working Papers 202315, University of Barcelona, Research Institute of Applied Economics, revised Nov 2023.
    5. Oguzhan Ozcelebi & Nurtac Yildirim, 2017. "Interrelations Between External and Internal Macroeconomic Factors: Empirical Evidence on Some OECD Countries," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 15(2), pages 147-174.
    6. Fernández-Rodríguez, Fernando & Gómez-Puig, Marta & Sosvilla-Rivero, Simón, 2016. "Using connectedness analysis to assess financial stress transmission in EMU sovereign bond market volatility," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 43(C), pages 126-145.
    7. Ordoñez-Callamand, Daniel & Gomez-Gonzalez, Jose Eduardo & Melo-Velandia, Luis Fernando, 2017. "Sovereign default risk in OECD countries: Do global factors matter?," The North American Journal of Economics and Finance, Elsevier, vol. 42(C), pages 629-639.
    8. Akram, Tanweer & Li, Huiqing, 2017. "What keeps long-term U.S. interest rates so low?," Economic Modelling, Elsevier, vol. 60(C), pages 380-390.
    9. Sinan Esen & Feyyaz Zeren & Halil Şimdi, 2015. "CDS and Stock Market: Panel Evidence Under Cross-Section Dependency," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 13(1), pages 31-46.
    10. Özmen, Erdal & Doğanay Yaşar, Özge, 2016. "Emerging market sovereign bond spreads, credit ratings and global financial crisis," Economic Modelling, Elsevier, vol. 59(C), pages 93-101.

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    More about this item

    Keywords

    Bond spread; SVAR; Sovereign risk; Emerging market; Risk aversion;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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