IMF Working Papers

Emerging Market Sovereign Bond Spreads: Estimation and Back-testing

Author/Editor:

Fabio Comelli

Publication Date:

August 1, 2012

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Summary:

We estimate sovereign bond spreads of 28 emerging economies over the period January 1998-December 2011 and test the ability of the model in generating accurate in-sample predictions for emerging economies bond spreads. The impact and significance of country-specific and global explanatory variables on bond spreads varies across regions, as well as economic periods. During crisis times, good macroeconomic fundamentals are helpful in containing bond spreads, but less than in non-crisis times, possibly reflecting the impact of extra-economic forces on bond spreads when a financial crisis occurs. For some emerging economies, in-sample predictions of the monthly changes in bond spreads obtained with rolling regression routines are significantly more accurate than forecasts obtained with a random walk. Rolling regression-based bond spread predictions appear to convey more information than those obtained with a linear prediction method. By contrast, bond spreads forecasts obtained with a linear prediction method are less accurate than those obtained with random guessing.

Series:

Working Paper No. 2012/212

Subject:

Bond yields Emerging and frontier financial markets Financial institutions Financial markets Financial services Securities markets Sovereign bonds Yield curve