Sovereign Risk and the Impact of Crisis: Evidence from Latin America
71 Pages Posted: 15 Aug 2016
Date Written: July 2, 2016
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: Suggested Citation