Emerging market yield spreads: Domestic, external determinants, and volatility spillovers

Abstract

This study examines the determinants of bond yield spreads for 22 emerging markets in the period 1998-2009. Several determinants are considered. In addition, I consider the connection between volatility and bond yield spreads. Volatility and central bank transparency are two factors common to all countries examined whereas clear idiosyncrasies are found according to whether emerging markets are in Latin and South America, Europe, Asia or Africa. Most notably, the global financial crisis raised yield spreads, except in Asia, which suggests that, in a sense, bond markets in that region were decoupled from those in other parts of the world.

The Determinants of Sovereign Risk Premium in African Countries

“…In contrast, Martinez et al (2013) find that the GDP growth and the public debt/GDP ratio are statistically insignificant, although they present the correct sign. However, our findings are in line with those of Baek et al (2005), Siklos (2011), Maltritz and Molchanov (2013), who note that high growth rates reduce the sovereign default risk. This means that the increase in the general economic performance of a country raises the macroeconomic stability in the fiscal variables hence, lowering the probability of a sovereign default.…”

“…The increase in economic growth raises the tax revenue used for servicing debt and, therefore, there is a decline in default risks. This is in line with studies by Siklos (2011) and Maltritz and Molchanov (2013), who show that the bond spread reduces in response to an improvement in the GDP growth rate. There is a negative correlation between foreign exchange reserves/GDP and bond spread.…”

“…The coefficient on GDP growth is significant at 5% and 10% level in Kenya, Nigeria, Zambia, and South Africa and has mixed signs. As explained by Siklos (2011), this implies that an improvement in economic performance may either increase or decrease the sovereign risk premium. Our results show that the improvement in economic growth reduces sovereign risks in Nigeria and South Africa, whereas it doesn't reduce sovereign risks in Zambia and Kenya.…”

“…As noted by Audzeyeva and Schenk-Hoppé (2010), the investor's sentiments significantly affect the bond spread. Similarly, Siklos (2011), highlight that the degree of investor's risk aversion is an important factor in explaining bond spread variations.…”

“…Studies such as Furceri and Zdzienicka (2012) have shown evidence of sovereign defaults in the selected African countries. However, Siklos (2011), points out that most of the studies focus on the determinants of bond spread in emerging market economies and developed economies. For instance, Kaminsky and Schmukler (1999), find that changes in the foreign interest rate increase the country spread and that the impact is high in countries with low credit ratings.…”