Sovereign Bond Spreads of Emerging Economies Versus the US Dollar: the Role of Country-Specific variables and Macroeconomic Fundamentals

A default in an emerging economy is mostly associated with an increase in yield spread. This paper examines the determinants of sovereign bond spread in the period 1999 – 2008. In particular, the focus is on three groups whose significance is implied by previous work: liquidity and solvency variables, macroeconomic fundamentals, external shocks and controlled by dummy variable. By means of pooled data estimation and OLS on eight countries, this paper found that liquidity and solvency variables are not capable of explaining the emerging economies spread. Surprisingly, ratio of total external debt to GDP, growth rate of import and export are not significant. In addition, strong empirical evidence is observed on macroeconomic fundamentals such as terms of trade and inflation. Moreover, external shocks which have been measured by oil price and the U.S. Treasury bill appear to explain the most part of sovereign bond spread. This result implies that an increase in oil price and holders of debt are positive related to an expansion in emerging bond spread. This finding is robust to variable differences. However, panel data analysis indicates liquidity and solvency variables are more significant than the use of pooled data estimation. This paper also considers the impact of an economic crisis in other emerging economies. Empirically, support is found for contagion effect to neighbor emerging economies