Journal
FINANCE RESEARCH LETTERS
Volume 58, Issue -, Pages -Publisher
ACADEMIC PRESS INC ELSEVIER SCIENCE
DOI: 10.1016/j.frl.2023.104665
Keywords
Sovereign CDS spreads; Sovereign risk; Frontier markets; Spillover and feedback effects; Dynamic spatial panel with interactive; fixed-effects
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This paper examines the macroeconomic determinants of sovereign risk for frontier markets by considering spatial linkages of bilateral trade, financial correlation, and bilateral distance. The findings suggest that there are spillover effects from the explanatory variables towards the Credit default swaps (CDSs) premium of itself and neighboring countries. Bilateral distance and trade are identified as the most significant spatial linkages. The study highlights the importance of policymakers taking into account regional contagion channels that transmit sovereign risk.
This paper considers spatial linkages of bilateral trade, financial correlation, and bilateral distance to study the macroeconomic determinants of sovereign risk for frontier markets. It applies (Shi and Lee, 2017) dynamic spatial Durbin model with interactive fixed effects. Analysis confirms the existence of spillover effects stemming from the explanatory variables' movement towards the Credit default swaps (CDSs) premium of itself and neighboring countries. Bilateral distance and trade are the most significant spatial linkages. All macroeconomics except reserves impact CDS spreads directly and through feedback effects. Spatial dependence strengthens during recessions. Findings suggest policymakers should account for regional contagion channels that transmit sovereign risk.
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