On%20Emerging%20Economy%20Sovereign%20Spreads%20and%20Ratings

Working Papers

On Emerging Economy Sovereign Spreads and Ratings


CODE: WP-629
AUTHOR(s): Martinez S., Juan F. , Powell, Andrew
PUBLISHED: January 2008
LANGUAGE: English
RELATED TOPICS: Finance
DOWNLOAD FILE IN: English

Abstract:

This paper analyzes alternative models for emerging sovereign ratings. Although a small number of economic fundamentals explain ratings reasonably well, variations in those economic fundamentals are themselves explained by a small number of world factors. On the other hand, global financial variables associated with risk aversion are additionally required in order to explain the significant spread compression at the end of 2006. To determine whether ratings matter for spreads, the paper compares results across different methodologies, in particular exploiting differences in opinion between rating agencies. The evidence from this and previous methodologies is that ratings do matter. Finally, the paper finds that global indicators of risk aversion have become less important for emerging market spreads and that the effect of sub-prime news is less than the effect of “average news” on emerging economy credit default swap (CDS) spreads.

Related Research by JEL Codes:
(or click here to find research by JEL Codes)
  • Do Credit Rating Agencies Add Value? Evidence from the Sovereign Rating Business Institutions
    Working Papers
    WP-647 - November 2008

    If rating agencies add no new information to markets, their actions are not a public policy concern. But as rating changes may be anticipated, testing whether ratings add value is not straightforward. This paper argues that ratings and spreads are both noisy signals of fundamentals and suggest ratings add value if, controlling for spreads, they help explain other variables. The paper additionally ... (View publication)

  • On Corporate Borrowing, Credit Spreads and Economic Activity in Emerging Economies: An Empirical Investigation
    Working Papers
    IDB-WP-719 - August 2016

    This paper studies the influence of external financial factors on economic activity in emerging economies (EMEs) motivated by a considerable increase in foreign financing by the corporate sector in EMEs since the early 2000s, mainly in the form of bond issuance. A quarterly external financial indicator for several EMEs is built using bond-level data on spreads of corporate bonds issued in fore ... (View publication)

  • Making International Financial Integration Work for Low-Saving Countries
    Working Papers
    IDB-WP-823 - July 2017

    Deeper financial integration is expected to enable low-saving countries to increase domestic investment but also to increase crisis risks by facilitating the accumulation of risky foreign liabilities. This paper explores the connections between financial integration, investment and crisis risk to assess this tradeoff. It confirms expectations but also finds that the accumulation of safe foreign as ... (View publication)

Hello, Welcome to the IDB!

Please join our mailing list by simply entering your email below.