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The differential impact of political risk factors on emerging market bond spreads and credit rating outlooks

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  • Sonenshine, Ralph
  • Kumari, Sapna

Abstract

It is well established that sovereign bond spreads vary with changes in financial conditions and political risk factors. What is less evident is the differential impact of political risk factors relative to the financial conditions of emerging market (EM) countries. This paper fills this gap by analyzing how changes in political risk overall and political risk components impact EM bond spreads and credit ratings. We find that improving political risk factors lowers sovereign bond spreads and improves credit rating outlooks. However, the effect varies by type of political risk. Also, the impact varies by type of EM country, with more of the impact of political risk components affecting higher financial risk countries.

Suggested Citation

  • Sonenshine, Ralph & Kumari, Sapna, 2022. "The differential impact of political risk factors on emerging market bond spreads and credit rating outlooks," Journal of Economics and Business, Elsevier, vol. 120(C).
    • Handle: RePEc:eee:jebusi:v:120:y:2022:i:c:s0148619522000224
    DOI: 10.1016/j.jeconbus.2022.106066
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    More about this item

    Keywords

    Credit ratings; Corruption; Political risk; Government stability; Law and order; Conflict; Institutions; Democracy; Bond spreads;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • F3 - International Economics - - International Finance
    • F5 - International Economics - - International Relations, National Security, and International Political Economy

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