Balance sheet effects and original sinners’ risk premiums

The Determinants of Sovereign Risk Premium in African Countries

“…If the level of reserve accumulation declines, then the likelihood of a sovereign default is high. These results are consistent with Tkalec et al (2014), who show that the accumulation of foreign exchange reserves raises a country's liquidity level, thereby lowering the sovereign bond spread. In practice, foreign exchange reserves are accumulated to raise a country's ability to meet its external debt obligations.…”

“…The accumulation of foreign exchange reserves should reduce the country's risk. 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.…”

“…While some studies, such as those by Baldacci et al (2011), Iara and Wolff (2014), indicate that domestic fundamentals are responsible for changes in the sovereign risk premium. For instance, Tkalec et al (2014) demonstrate that an increase in current account deficit raises the level of sovereign risk premium. In addition, De Grauwe and Ji (2012) point out that a high ratio of public debt/GDP increases the debt-servicing burden, which in turn raises debt-servicing costs, along with the likelihood of a sovereign default.…”

“…As defined by Hilscher and Nosbusch (2010), sovereign risk premium is the difference between the interest rate on the sovereign bond and the interest rate on a risk-free U.S. Treasury bond of comparable maturity. According to Tkalec et al (2014), the sovereign bond spread is the compensation to investors for default risk in case the realized welfare loss from default exceeds the expected welfare loss. Sovereign spreads are a proxy for the country risk premium which refers to the risk associated with the probability that a country will default on its debts.…”

The Determinants of Country Risk Premium Volatility: Evidence from a Panel VAR Model

“…Most of the literature implicitly recognizes that market conditions, especially market volatility, determine much of the overall spread movements. Studies such as Ebner (2009), Beber, Brandt and Kavajecz (2009), Bellas, Papaioannou and Petrova (2010, Alexopoulou, Bunda and Ferrando (2010), Dumičić and Ridzak (2011) and Tkalec, Vizek and Verbič (2014) thus control directly for market volatility using the VIX or DAX volatility index. However, by doing that, most of the variance of sovereign spreads is naturally explained by market volatility as volatility indices are usually the only heteroscedastic explanatory variable in a model seeking to examine the determinants of sovereign spreads which are also heteroscedastic.…”