Effects of Macroeconomics and Financial Fundamentals on Emerging Market Risk Premia

In this paper, we aim to analyze the sources of shocks having external causes to macroeconomics, and financial fundamentals that affected the risk premia of emerging markets (EMs) bonds. Countryspecific factors especially, spillover effects, remain essential, which is the effect of a series of seemingly unrelated events from one country to other countries over time. Formulating and examining the measures of country-specific spillovers includes the study of both non-crisis and crisis episodes. It seems more common that in order for a macroeconomic or financial fundamentals to hit the real EMs economy significantly, we consider a base country that takes the top spot as the world’s largest economy. Also, the fixed effects panel regression model with macroeconomics and financial fundamentals determines the main significant variables that affected emerging markets’ risk premium. Empirical results suggest that countries with almost the same economic conditions have the same strong macroeconomic and financial fundamentals, affecting their local risk premium. Additionally, we try to identify dynamic relationships among the EMs and the US bond prices using the Choleskydecomposition ordering and differences in the timing of movements in those variables.

کلیدواژه ها:

Emerging market ، Local currency bond risk premium ، Spillover ، Panel VAR (VectorAutoregression) ، Cholesky decomposition