Sovereign Spreads: a Factorial Approach

Abstract

This paper explores and estimates idiosyncratic and global factors that affect the evolution of sovereign spreads in emerging economies, with an emphasis on the Chilean case, for the period from January 1998 to September 2005. We find that a small number of global factors explain a large part of the sovereign spreads’ variability. In line with certain differentiation of international investors toward investment-grade economies, global factors seem to account for a smaller proportion of the sovereign spreads’ variability in these economies. In addition, we find that the recent reduction in Chile’s country risk can be explained by the evolution of both the idiosyncratic factor determined in principle by robust macrofinancial fundamentals and—mainly—of the global factors associated with world growth projections.