Sovereign Risk and the Impact of Crisis: Evidence from Latin America

71 Pages Posted: 15 Aug 2016

See all articles by Jonathan A. Batten

Jonathan A. Batten

RMIT University

Gerard L. Gannon

Deakin University - School of Accounting, Economics and Finance

Kannan S. Thuraisamy

Deakin University - Faculty of Business and Law

Date Written: July 2, 2016

Abstract

We utilize the default by Argentina in 2001 and the Global Financial Crisis in 2008, as natural experiments, to monitor the complex interactions between sovereign bonds when subjected to endogenous and exogenous shocks. By forming pairs of Latin American sovereign bonds, bundled into similar maturity class, the analysis highlights the complex nature of risk shifting, and the temporal nature of the volatility transmission and sharing mechanisms in the lead up to, and after, a crisis period. The results show that shorter maturity groups and longer maturity groups behave in fundamentally different ways in terms of volatility transmission, while one or two leading countries act as regional benchmarks. The dynamics are consistent with temporal but segmented investor preferences, with the arrival of crisis contributing to a breakdown in the previous relationships. In addition, there is additional economic benefit from utilizing knowledge of the volatility structure underlying the historic transmission channels to improve the portfolio outcomes of market participants.

Keywords: Argentina Default, Final Crisis, Global Financial Crisis, Latin America, Volatility, Spillovers, Sovereign Bond Markets, Transmission, Volatility Linkages

JEL Classification: G15, G12

Suggested Citation

Batten, Jonathan A. and Gannon, Gerard L. and Thuraisamy, Kannan S., Sovereign Risk and the Impact of Crisis: Evidence from Latin America (July 2, 2016). Available at SSRN: https://ssrn.com/abstract=2823337 or http://dx.doi.org/10.2139/ssrn.2823337

Jonathan A. Batten (Contact Author)

RMIT University ( email )

Level 12, 239 Bourke Street
Melbourne, Victoria
Australia

HOME PAGE: http://https://www.rmit.edu.au/contact/staff-contacts/academic-staff/b/batten-professor-jonathan

Gerard L. Gannon

Deakin University - School of Accounting, Economics and Finance ( email )

221 Burwood Highway
Burwood, Victoria 3215
Australia

Kannan S. Thuraisamy

Deakin University - Faculty of Business and Law ( email )

Burwood, Victoria 3215
Australia

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