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Identifying risks in emerging market sovereign and corporate bond spreads

Authors
Journal
Emerging Markets Review
1566-0141
Publisher
Elsevier
Volume
20
Identifiers
DOI: 10.1016/j.ememar.2014.05.002
Keywords
  • Emerging Markets
  • Credit Risk
  • Bayesian Econometrics
  • Systematic Risk
Disciplines
  • Mathematics

Abstract

Abstract This paper investigates the systematic risk factors driving emerging market (EM) credit risk by jointly modeling sovereign and corporate credit spreads at a global level. We use a multi-regional Bayesian panel VAR model, with time-varying betas and multivariate stochastic volatility. This model allows us to decompose credit spreads and build indicators of EM risks. A key result is that indices of EM sovereign and corporate credit spreads differ because of their specific reactions to global risks (risk aversion, liquidity and US corporate risk). For example, following Lehman's default, EM sovereign spreads ‘decoupled’ from the US corporate market, whereas EM corporates ‘recoupled.’

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