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Determinants of sovereign risk: macroeconomic fundamentals and the pricing of sovereign debt

Hilscher, Jens and Nosbusch, Yves (2010) Determinants of sovereign risk: macroeconomic fundamentals and the pricing of sovereign debt. Review of Finance, 14 (2). pp. 235-262. ISSN 1572-3097

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Abstract

This paper investigates the effects of macroeconomic fundamentals on emerging market sovereign credit spreads. We find that the volatility of terms of trade in particular has a statistically and economically significant effect on spreads. This is robust to instrumenting terms of trade with a country-specific commodity price index. Our measures of country fundamentals have substantial explanatory power, even controlling for global factors and credit ratings. We also estimate default probabilities in a hazard model and find that model implied spreads capture a significant part of the variation in observed spreads out-of-sample. The fit is better for lower credit quality borrowers.

Item Type: Article
Official URL: http://rof.oxfordjournals.org/
Additional Information: © 2010 The Authors
Library of Congress subject classification: H Social Sciences > HG Finance
H Social Sciences > HJ Public Finance
Journal of Economic Literature Classification System: F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing; Futures Pricing
G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets
Sets: Departments > Finance
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 21 Dec 2010 13:14
URL: http://eprints.lse.ac.uk/31022/

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