RT Journal Article SR Electronic T1 The Dynamic Pricing of Sovereign Risk in Emerging Markets JF The Journal of Fixed Income FD Institutional Investor Journals SP 57 OP 71 DO 10.3905/jfi.2008.705542 VO 17 IS 4 A1 Eli M Remolona A1 Michela Scatigna A1 Eliza Wu YR 2008 UL https://pm-research.com/content/17/4/57.abstract AB This article introduces a new approach to pricing sovereign risk based on sovereign credit default swap (CDS) spreads. We estimate a dynamic market-based measure of sovereign risk and use it to decompose sovereign CDS spreads into expected losses from default and the market risk premia required by investors as compensation for default risk. Using a dynamic panel data model, we find that country-specific fundamentals primarily drive sovereign risk while global investors' risk aversion drives time variation in the risk premia. Consistent with this, we also find that the sovereign risk premia is more highly correlated than sovereign risk itself within emerging market regions. These results help us to explain the remarkable narrowing of emerging market spreads between 2002 and 2006 and to understand the pricing mechanism and channel of contagion for emerging debt markets.TOPICS: Emerging markets, credit default swaps, credit risk management, statistical methods