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Credit spread drivers and cross-country connectedness: a study of emerging economies in Asia

Author

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  • Mohit Kumar
  • P. Krishna Prasanna

Abstract

Purpose - While the existing literature lacks a holistic approach to determining credit spreads and is limited to mostly developed countries, this study investigates credit spread determinants and their cross-country connectedness in the context of four emerging economies in Asia by incorporating bonds, market risk, macroeconomic and global factors. Design/methodology/approach - This study utilizes principal component analysis for dimensionality reduction and variable representation. Furthermore, we employ the dynamic conditional correlation–generalized autoregressive conditional heteroskedasticity model to capture the cross-country credit spread connectedness between the variables. Findings - The findings indicate that market volatilities are the most significant drivers of credit spreads, while global factors play a moderating role. Furthermore, the results provide compelling evidence of cross-country credit spread connectedness, with China as the primary transmitter and Malaysia as the primary receiver among the selected emerging economies. Originality/value - This study addresses the limitations of previous research by extending the analysis beyond the commonly studied developed economies and focusing on emerging economies in Asia. It also employs a comprehensive approach to determine credit spread and explores cross-country credit spread connectedness in developing economies, thereby shedding light on financial risks and vulnerabilities within interconnected global financial systems.

Suggested Citation

  • Mohit Kumar & P. Krishna Prasanna, 2024. "Credit spread drivers and cross-country connectedness: a study of emerging economies in Asia," Journal of Asian Business and Economic Studies, Emerald Group Publishing Limited, vol. 31(5), pages 338-350, October.
  • Handle: RePEc:eme:jabesp:jabes-10-2023-0392
    DOI: 10.1108/JABES-10-2023-0392
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    More about this item

    Keywords

    Credit spreads; Corporate bonds; Emerging countries; Cross-country connectedness; B22; D53; E43; F15; G12; G15;
    All these keywords.

    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F15 - International Economics - - Trade - - - Economic Integration
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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