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Modelling Sovereign Credit Spreads with International Macro Factors: The Case of Brazil 1998-2009

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Publication details

JournalJournal of Banking and Finance
DatePublished - Feb 2013
Issue number2
Volume37
Number of pages16
Pages (from-to)241-256
Original languageEnglish

Abstract

This paper develops a macro-finance model of the Brazilian economy and its sovereign debt markets that allows for domestic and international macroeconomic influences as well as swings in investor confidence. It finds significant evidence of common trends in the US and Brazilian economies and bond markets as well as spillover effects from US inflation and business cycles to the Brazilian economy. The US Fed Funds rate influences Brazilian sovereign spreads, as do Brazilian inflation and policy rates. The Brazilian common risk factor dominates the behavior of the spreads during periods of crisis and we find that it also affects the level and volatility of macroeconomic variables. These results suggest that the macro-finance approach could throw light upon the behavior of other emerging economies and markets.

Bibliographical note

Co-authored by Zhuoshi Liu of Bank of England

    Research areas

  • affine term structure model, macro finance, sovereign credit spread, international spillover, macroeconomic volatility

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