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The Term Structure of Sovereign Default Risk in an Emerging Economy

Author

Listed:
  • Jair N Ojeda-Joya

    (Central Bank of Colombia, Carrera 7 No. 14-78 Piso 11, Bogotá, Colombia. E-mails: jojedajo@banrep.gov.co; jgomezgo@banrep.gov.co)

  • José E Gómez-González

    (Central Bank of Colombia, Carrera 7 No. 14-78 Piso 11, Bogotá, Colombia. E-mails: jojedajo@banrep.gov.co; jgomezgo@banrep.gov.co)

Abstract

We study the time-varying structure of sovereign default risk in Colombia focusing on different time spans indicated by yield spreads of government bonds with different maturities. Instrumental-variable regressions are performed to analyze whether the drivers of this risk change along its term structure. We show that although spreads are correlated across maturities, their relative behavior and determinants are not uniform. In fact, we are able to identify some determinants that drive sovereign risk at long-run maturities but are not related to short-run risk, namely, government indebtedness, terms of trade and international reserves. Short-run risk is mostly driven by investment, asset prices and international trade indicators. In contrast to recent literature, we find that domestic factors are more important drivers of sovereign risk than global factors in Colombia. In addition, global factors are found to be relatively more important as drivers of long-run risk versus short-run risk.

Suggested Citation

  • Jair N Ojeda-Joya & José E Gómez-González, 2014. "The Term Structure of Sovereign Default Risk in an Emerging Economy," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 56(4), pages 657-675, December.
    • Handle: RePEc:pal:compes:v:56:y:2014:i:4:p:657-675
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    Cited by:

    1. 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.
    2. Espinosa-Torres, Juan Andrés & Gomez-Gonzalez, Jose Eduardo & Melo-Velandia, Luis Fernando & Moreno-Gutiérrez, José Fernando, 2016. "The international transmission of risk: Causal relations among developed and emerging countries’ term premia," Research in International Business and Finance, Elsevier, vol. 37(C), pages 646-654.
    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).

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