PT  - JOURNAL ARTICLE
AU  - Eli M Remolona
AU  - Michela Scatigna
AU  - Eliza Wu
TI  - The Dynamic Pricing of Sovereign Risk in Emerging Markets
AID  - 10.3905/jfi.2008.705542
DP  - 2008 Mar 31
TA  - The Journal of Fixed Income
PG  - 57--71
VI  - 17
IP  - 4
4099  - https://pm-research.com/content/17/4/57.short
4100  - https://pm-research.com/content/17/4/57.full
AB  - This article introduces a new approach to pricing sovereign risk based on sovereign credit default swap (CDS) spreads. We estimate a dynamic market-based measure of sovereign risk and use it to decompose sovereign CDS spreads into expected losses from default and the market risk premia required by investors as compensation for default risk. Using a dynamic panel data model, we find that country-specific fundamentals primarily drive sovereign risk while global investors' risk aversion drives time variation in the risk premia. Consistent with this, we also find that the sovereign risk premia is more highly correlated than sovereign risk itself within emerging market regions. These results help us to explain the remarkable narrowing of emerging market spreads between 2002 and 2006 and to understand the pricing mechanism and channel of contagion for emerging debt markets.TOPICS: Emerging markets, credit default swaps, credit risk management, statistical methods