Determinants of market-assessed sovereign risk: Economic fundamentals or market risk appetite?

A new country risk index for emerging markets: A stochastic dominance approach

“…Our findings on the prevailing role of financial over economic and political indicators in assessing country risk is in line with the literature showing that the country risk premium in emerging markets is left unexplained if only changes in economic fundamentals are considered (Eichengreen and Mody (1998)) and that market attitude toward risk has a large impact on emerging market bond spreads (Min (1998), Baek et al (2005)). As Baek et al (2005) emphasize "the divergence between traditional gauges of country risk that are primarily based on the economic fundamentals of a country and the market-assessed risk premium is perhaps a result of changes in the general market mood towards risk in emerging countries".…”

“…Our analysis attaches an insignificant role to current account balance to GDP ratio, which is often employed as a solvency variable. However, this economic variable turns out to be of less significance also in some other studies (see Baek et al (2005), for example). Finally, debt-to-GDP ratio is a widely used indicator of a country's solvency and the probability of default, which makes our result counter-intuitive.…”

“…As Baek et al (2005) emphasize "the divergence between traditional gauges of country risk that are primarily based on the economic fundamentals of a country and the market-assessed risk premium is perhaps a result of changes in the general market mood towards risk in emerging countries". Our analysis, which employs also very recent data, is able to capture the growing development of the financial sector in emerging countries and the primary role of monetary policy and of international monetary institutions as key determinants of sovereign risk.…”

A sovereign risk index for the Eurozone based on stochastic dominance

“…Most literature in the context of a monetary union has been dissecting a systemic risk factor, associated with shifts in international appetite, or "the e¤ects of common macroeconomic shocks on economic fundamentals" (Ang and Longsta¤, 2013, p. 493), and has discarded country-speci…c determinants (Eichengreen and Mody, 2000;Baek et al, 2005;Reinhart and Rogo¤, 2009;Dieckmann and Planck, 2012). Spillovers e¤ects and contagion (see e.g., Kaminsky et al, 2003, Bekaert et al, 2011Longsta¤ et al 2011) have also been studied to analyze the common shock mechanism that is not related to country-speci…c fundamentals.…”

China's Capital Controls Through the Prism of Covered Interest Differentials

“…See for example, Favero, et al (1997), Eichengreen and Mody (1998), Kamin and von Kleist (1999), Kaminsky and Schmukler (2001), Mauro, et al (2002), and Baek, et al (2005). The results presented under column 5 show that it is the two exchange rate related variables, exchange rate volatility (EV), and nominal effective exchange rate change (dNEER) that have significant impacts.…”