The sovereign spread in Asian emerging economies: The significance of external versus internal factors

Abstract

This paper investigates the dynamic relations between external factors, domestic macroeconomic factors and sovereign spreads in Asian emerging countries. We conduct our analysis using a methodology that combines theoretical and empirical elements, using a Structural Vector Autoregression (SVAR) model. In particular, we investigate how the spread of sovereign debt is influenced over time by both external as well as domestic factors. Moreover, we generate variance decompositions and impulse response functions. Our results show that variations in sovereign spreads are mainly driven by external shocks, with the term structure of U.S. interest rate and the global risk aversion having the most important role. The findings also indicate that shocks from the U.S. have a direct effect on sovereign spread and an indirect effect via domestic macroeconomic fundamentals. Finally, the evidence produced validates the presence of some response patterns of sovereign spread to the external shocks.