Sovereign Risk Analysis of Developing Countries: Findings from Credit Default Swap Premium Behaviour (original) (raw)
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Pressacademia, 2020
Purpose-For developing countries that are highly dependent on foreign investment in terms of saving gap funding, risk assessment tools are crucially important. Under the evolving circumstance of flow of international funds along the last decade, this study aims to investigate into causality relationship among sovereign credit default swap premiums, interest and currency rates of "Fragile Three" Countries of Brazil, South Africa and Turkey through new generation econometric methods for the period of 2007M2-2017M1. Methodology-To that end, stationarity, co-integration and causality relationships were analysed by means of Kapetanios's (2005) multi-structura l fractural unit root test, Johansen Cointegration Test (1990) and Toda-Yamamoto (1995) test (TY), respectively. Findings-Our findings suggest that these variables of F3 countries are influenced substantially from each other. Conclusion-The necessary economic policies should be developed to ensure permanent stability at exchange rate and interest rate levels. In order to ensure these countries to maintain financial stability, economic, political and social reforms are required to minimize country risks and to decrease dependency on foreign capital.
SSRN Electronic Journal, 2003
This Working Paper should not be reported as representing views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. In times of distress when a country loses access to markets, there is evidence that credit default swap (CDS) spreads are a leading indicator for sovereign risk than the EMBI+ sub-index for the country. However, it is not easy to discern the variables that determine the level of CDS spreads in Emerging Markets (EM); traders only quote the CDS spreads and not the inputs that are required to calculate such spreads. This note provides some evidence from Argentina and Brazil that reveals inconsistency between theory and practice in pricing CDS spreads in EM. This note suggests an alternate methodology that links CTD (cheapest-to-deliver) bonds to recovery values assumed in CDS contracts. Furthermore, special features that pertain to CDS contracts (repo specialness, short squeezes by central banks) may also magnify the financial distress of a sovereign.
Determinants of Sovereign Credit Ratings in Emerging Markets
International Business Research
This study critically investigates the determinants of sovereign credit ratings in emerging markets, during 2001 to 2015. This was conducted in 20 emerging markets, using S&P and Moody ratings. Linear framework econometric approach with the use of pooled Ordinary Least Square regression method was adopted in the study. The explanatory power of the estimated models has a good performance across both rating agencies. The study reveals the importance of five macroeconomic variables in determining the sovereign credit rating of emerging markets. These variables are: gross domestic product per capital, inflation, government debt, reserves, and external debt. Also, world governance indicators, a proxy for qualitative/political variables, were found to be an essential determinant of rating.
Understanding the sovereign credit ratings of emerging markets
Emerging Markets Review, 2014
This paper identifies the macroeconomic factors behind the sovereign credit ratings of global emerging markets assigned by Standard and Poor's (S&P). The financial integration and globalization of capital markets have facilitated the capital inflows/outflows among countries. Sovereign credit ratings have served as a signal for countries' economic, financial and political situations. Ratings are very important in the sense that they attract capital inflow and investments. This is especially vital for emerging markets. Although the rating agencies do not explicitly reveal their methodologies, it is possible to guess the effects of several variables on ratings by using various econometric models. Concerning the heavy criticisms on rating agencies' performances, we wish to examine the sovereign credit ratings within a specific country-category. In this essay, we study the effects of macroeconomic factors on the sovereign ratings of emerging markets. Using several approaches, we find that the most relevant factors are Budget Balance/GDP, GDP per capita, Governance Indicators and Reserves/GDP. Moreover, our model predicts up to 93% of all credit rating levels. Interestingly, we obtain that S&P's evaluation of the sovereign credit rating for Turkey performs poorly, especially in the highest rating levels.
The Determinants of Sovereign Risk Premium in African Countries
Journal of Risk and Financial Management
This paper investigates the determinants of the sovereign risk premium in African countries. We employ the dynamic fixed effects model to determine the key drivers of sovereign bond spreads. Country-specific effects are fixed and the inclusion of dummy variables using the Bai–Perron multiple structural break test is significant at a 5% level. For robustness, the time-series generalized method of moments (GMM) is used where the null hypothesis of the Sargan Test of over-identifying restrictions (OIR) and the Arellano–Bond Test of no autocorrelation are not rejected. This implies that the instruments used are valid and relevant. In addition, there is no autocorrelation in the error terms. Our results show that the exchange rate, Money supply/GDP (M2/GDP) ratio, and trade are insignificant. Furthermore, our findings indicate that public debt/GDP ratio, GDP growth, inflation rate, foreign exchange reserves, commodity price, and market sentiment are significant at a 5% and 10% level.
Examination of the Macroeconomic Variables affecting Credit Default Swaps
Many investors, money authority and reputable institutions closely follow credit default swaps while they regard them as reliable tool of measuring country credibility, since credit default swaps (CDS) come into prominence as an important indicator for country risks in recent years. Therefore, this phenomenon creates itself an area in academics, and examination of countries' default spreads and determining the macroeconomic variables affecting them become an important academic area. For these reasons, there are lots of researches have been made in this subject in Turkey and world recently. In this research, the macroeconomic variables, which affect country default swaps of developing countries, including Turkey, are determined and examined; moreover, the effects of chosen macroeconomic variables on country default swaps are analyzed. The subject of the research is not a static case, thus Generalized Method of Moments (GMM) estimator method from dynamic panel data methods and Residual Linear Regression Model are used. According to the results of the analyses, it is found out that the selected variables which are (i) increase in current account balance, (ii) real interest rates, (iii) GDP growth rates, (iv) inflation rates and (v) annual positive changes in S&P Global Reit Index have important effects on CDS spreads.
The aim of the paper is to explain the determinants of emerging market sovereign CDS spreads in the light of European debt crisis. There are two important types of factors that determined the evolution of sovereign CDS spreads: global, which equally affected all emerging markets and countryspecific factors, which reflect the economic fundamentals of the countries. We use data on five-year sovereign CDS spreads for selected Eastern European countries during the period 2008-2010. In order to examine the spillover effects of sovereign debt crisis on the emerging economies CDS spreads, we introduce in our analysis the evolution of Greece CDS spreads for the same period. We find that changes in the sovereign CDS spreads of CEE countries are (jointly) determined by the investors risk appetite, economic fundamentals, spillover effect, and rating downgrade.
Dynamic interdependence of sovereign credit default swaps in BRICS and MIST countries
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This paper examines the lead-lag relationships and volatility interactions of emerging markets sovereign credit default swaps (CDS). Using a multivariate VAR-EGARCH model and principal component analysis, we find significant volatility spillover effects within the two groups of emerging markets under study. Our evidence indicates that global financial market factors are dominant drivers of BRICS and MIST sovereign CDS spreads variability with the European debt crisis showing significant influence on emerging markets sovereign spreads.
The impacts of financial crisis on sovereign credit risk analysis in Asia and Europe
International Journal of Financial Engineering, 2015
In this paper, we investigate the nature of sovereign credit risk for selected Asian and European countries based on a set of sovereign CDS data over an eight-year period that includes the episode of the 2007–2008 global financial crisis. Our results indicate that there exists strong commonality in sovereign credit risk among the countries studied in this paper following the crisis. In addition, our results also show that commonality is importantly associated with both local and global financial and economic variables. However, there are markedly different impacts of the sovereign of credit risk in Asian and European countries. Specifically, we find that foreign reserve, global stock market, and volatility risk premium, affect Asian and European sovereign credit risks in the opposite direction. Lastly, we model the arrival rates of credit events as a square-root diffusion process from which a pricing model is constructed and estimated over pre- and post-crisis periods. Then the resu...
On Emerging Economy Sovereign Spreads and Ratings
SSRN Electronic Journal, 2008
On emerging economy sovereign spreads and ratings / by Andrew Powell, Juan Francisco Martínez. p. cm. (Research Department Working paper series ; 629) Includes bibliographical references. 1. Country risk. 2. Risk assessment. I. Martínez, Juan Francisco. II. Inter-American Development Bank. Research Dept. III. Title. IV. Series.