Sovereign bond spreads determinants in Latin American countries: Before and during the XXI financial crisis

The Determinants of Sovereign Risk Premium in African Countries

“…Hence, the hypothesized sign is negative, as shown by (Tkalec et al 2014). As noted by Bellas et al (2010) and Martinez et al (2013), a low ratio of foreign reserves/GDP translates into a high likelihood of sovereign default and liquidity risks. In addition, Ouyang and Rajan (2014), stress that the accumulation of foreign exchange reserves acts as an insurance against sovereign defaults.…”

“…The literature on country risk premium determinants in sub-Saharan Africa is relatively scant, despite the empirical evidence of sovereign defaults. Most of the studies, such as that by Martinez et al (2013), focus on the determinants of sovereign bond spreads in emerging market economies. This study uses quarterly data to estimate a panel fixed effects model on the seven Latin American countries, to investigate the determinants of bond spread.…”

“…Other studies such as that of Baldacci et al (2011) find that inflation is significant in influencing the sovereign risks. As described by Martinez et al (2013), a high inflation rate may be attributed to the monetization of the fiscal deficit and the need for higher interest rates. Hence, Min et al (2003), illustrate that an increase in inflation rate signaling macroeconomic instability will consequently raise the sovereign risk premium.…”

“…If the variables are cointegrated, then, we proceed to estimate Equation (8) using the panel dynamic fixed effects method. We build our model on the works of Martinez et al (2013), who investigate the determinants of sovereign risk premium in emerging market economies using panel fixed effects. Panel fixed effect models control for unobservable individual and time-specific effects.…”

“…However, the main contribution of the study is to investigate the key drivers of sovereign risk premium in African countries. Our study builds on the works of Martinez et al (2013), who employ a panel fixed effects model to examine the country risk premium determinants in emerging market economies. For robustness, we employ the Generalized Method of Moments with instrumental variables.…”