Vulnerability of Emerging Markets to Global Shocks

Abstract

The determinants of 24 emerging markets sovereign spreads from 1998 to 2006 are analyzed using a panel data model, which determines the countries' vulnerability to global risk shocks. Total Government Debt/GDP and governance indicators successfully explained the level and sensitiveness of all sovereign spreads. While supporting the assertion that global liquidity and low risk aversion have been the main drivers of the general fall on spreads after 2003, the vulnerability of emerging markets to external shocks are country specific and can be mitigated by improving Government debt and governance.