We analyze the relationship between global and country-specific factors and emerging market debt spreads from three different angles. First, we aim to disentangle the effect of global and countryspecific developments, and find that while both country-specific and global developments are important in the long-run, global factors are main determinants of spreads in the short-run. Second, we investigate whether and how the strength of fundamentals is related to the sensitivity of spreads to global factors. Countries with stronger fundamentals tend to have lower sensitivity to changes in global risk aversion. Third, we decompose changes in spreads and analyze the behavior of explained and unexplained components over different periods. To do so, we break down fitted changes in spreads into the contribution of country-specific and global factors, as well as decompose changes in the residual into the correction of initial misalignment and an increase/decrease in misalignment. We find that changes in spreads follow periods of tightening/widening, which are well-explained by the model; and the dynamics of the components of the unexplained residual follow all the major developments that impact market sentiment. In particular, we find that in the periods of severe market stress, such as during the intensive phase of the Eurozone debt crisis, global factors tend to drive changes in the spreads and the misalignment tends to increase in magnitude and its relative share in actual spreads. JEL Classification Numbers: E43, G12, G15

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The views expressed in this Working Paper arc those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper, using T -GARCH models, finds that the United States has been the major source of price and volatility spillovers to stock markets in the Asian region during three different periods in the last decade: the pre-Long Term Capital Management crisis period, the "tech bubble" period, and the "stock market correction" period. Hong Kong SAR, Japan, and Singapore also were important spillover sources within the Asian region and affected United States to a lesser degree during the "stock market correction" period. There is also evidence of structural breaks in the stock price and volatility dynamics induced during the "tech bubble" period.

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This Working Paper should not be reported as representing the views of the IMF.