What drives credit risk in emerging markets? The roles of country fundamentals and market co-movements [An article from: Journal of International Money and Finance]

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This digital document is a journal article from Journal of International Money and Finance, published by Elsevier in 2006. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.

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This paper uses bond prices to investigate how the creditworthiness of Argentina, Brazil, Mexico and Venezuela is influenced by global, regional and country-specific factors. Each country's distance-to-default is estimated monthly for 1994-2001, by fitting the structural model of Cathcart and El-Jahel [Cathcart, L., El-Jahel, L., 2003. Semi-analytical pricing of defaultable bonds in a signalling jump-default model. The Journal of Computational Finance 6, 91-108] with a Kalman Filter to Brady bonds. A small set of variables is able to explain up to 80% of the variance of the estimated distance-to-default for each country. Surprisingly, country-specific variables account for only about 8% of the explained variance; the largest part of the variance (45%) is explained by regional factors, which relate to joint stock-market returns, volatility and market sentiment; global conditions, related mainly to US stock-market returns, explain another 25% of the variance. Of the 20% variance which remains unexplained, more than half is due to another common (but unidentified) factor. The conclusion is that the creditworthiness of these four emerging markets is driven mainly by a common set of factors, which are related closely to stock markets in the region and the United States.

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