OECD Development Centre Working Papers

The OECD Development Centre links OECD members with developing and emerging economies and fosters debate and discussion to seek creative policy solutions to emerging global issues and development challenges. This series of working papers is intended to disseminate the OECD Development Centre’s research findings rapidly among specialists in the field concerned. These papers are generally available in the original English or French, with a summary in the other language.

English, French

Convergence and Divergence of Sovereign Bond Spreads

Lessons From Latin America

Latin American sovereign bonds represent a significant share of the emerging debt class (50 per cent by early 2001) and so have considerably shaped the dynamics of this market. Recent financial turmoil, contagion episodes and investors’ renewed concerns with debt default call for a better understanding of sovereign bond pricing (spreads) and its determinants, either macro fundamentals, contagion or other external variables. This paper addresses two important questions not fully tackled in the existing literature: i) to what extent do permanent or transitory changes in fundamentals affect sovereign risk perception, i.e. default risk, once contagion is controlled for? ii) how can a relatively high and volatile spread be the cause of unsustainable public debt accumulation? In order to answer these questions, we estimate long-term structural equations to pin down country risk determinants for Argentina, Chile and Mexico, using a time series framework spanning 1994-2000. Unlike former ...


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