Determinants of sovereign risk premia for European emerging markets

Abstract

This paper analyses the determinants of the changes in sovereign bond spreads in emerging European markets before and during the recent global financial crisis. In particular, these determinants are associated with changes in market sentiment and in domestic macroeconomic fundamentals. The model was estimated on panel data for eight central and eastern European countries between Q1:2000 and Q2:2010, using least squares and controlling for serial correlation. The results show that the dynamics of spreads can be explained by both market sentiment indicators and macroeconomic fundamentals. In particular, the external imbalances did not exert any discernible effect on spreads prior to the crisis, but became increasingly signifi cant as the crisis broke out.

Keywords

• sovereign bond spreads
• emerging markets
• central and eastern Europe
• global financial crisis
• market sentiment
• macroeconomic fundamentals