AN ANALYSIS OF THE IMPACT OF EXTERNAL FINANCIAL RISKS ON THE SOVEREIGN RISK PREMIUM OF LATIN AMERICAN ECONOMIES

Abstract: This article presents a quantification of the response of the sovereign risk premium (EMBI) of a group of Latin American countries, to unexpected changes (shocks) in external financial variables. The main contribution of the paper is to use the estimated parameters of a vector autoregressi...

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Autores principales: ALFARO,RODRIGO, MEDEL,CARLOS A., MORENO,CAROLA
Lenguaje:English
Publicado: ILADES. Universidad Alberto Hurtado. 2017
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Acceso en línea:http://www.scielo.cl/scielo.php?script=sci_arttext&pid=S0718-88702017000200131
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spelling oai:scielo:S0718-887020170002001312017-11-28AN ANALYSIS OF THE IMPACT OF EXTERNAL FINANCIAL RISKS ON THE SOVEREIGN RISK PREMIUM OF LATIN AMERICAN ECONOMIESALFARO,RODRIGOMEDEL,CARLOS A.MORENO,CAROLA Chile China Latin America external financing cost vector autoregressions scenario analysis Abstract: This article presents a quantification of the response of the sovereign risk premium (EMBI) of a group of Latin American countries, to unexpected changes (shocks) in external financial variables. The main contribution of the paper is to use the estimated parameters of a vector autoregression (VAR) model using a special Cholesky variance-covariance decomposition as a tool for risk scenario’s assessment. The proposed interpretation of the estimated matrix allows for the quantification of the impact of more than one shock and also to quantify spillovers. A VAR is estimated for each country (Colombia, Chile, Mexico, and Peru) in monthly frequency that includes China’s and Brazil’s EMBI, the global volatility index (VIX), plus the value of the dollar against a basket of currencies (Broad Index) and a proxy of the slope of the US Treasury yield curve (Spread US). The VIX and Broad Index shocks turn out to have a relatively homogenous effect on each country’s EMBI, while shocks to the China and Brazil EMBI are more heterogeneous. For the case of Chile, we further study three alternative risk scenarios, incorporating the copper price as an additional variable. The most disruptive scenario at the time when the shock hits is the “Volatility driven” one. Nevertheless, it is the “Emerging markets” scenario (namely one with simultaneous shocks to China’ and Brazil’s EMBI) the one with the most harmful dynamics, as it dyes out slower. Finally, a “Copper price bust” scenario, in which the price of copper drops significantly in addition to a shock to the EMBI China, is the one with the least effect as the price of copper is relatively less affected by shocks to other variables, displaying lower spillovers.info:eu-repo/semantics/openAccessILADES. Universidad Alberto Hurtado.Revista de análisis económico v.32 n.2 20172017-10-01text/htmlhttp://www.scielo.cl/scielo.php?script=sci_arttext&pid=S0718-88702017000200131en10.4067/S0718-88702017000200131
institution Scielo Chile
collection Scielo Chile
language English
topic Chile
China
Latin America
external financing cost
vector autoregressions
scenario analysis
spellingShingle Chile
China
Latin America
external financing cost
vector autoregressions
scenario analysis
ALFARO,RODRIGO
MEDEL,CARLOS A.
MORENO,CAROLA
AN ANALYSIS OF THE IMPACT OF EXTERNAL FINANCIAL RISKS ON THE SOVEREIGN RISK PREMIUM OF LATIN AMERICAN ECONOMIES
description Abstract: This article presents a quantification of the response of the sovereign risk premium (EMBI) of a group of Latin American countries, to unexpected changes (shocks) in external financial variables. The main contribution of the paper is to use the estimated parameters of a vector autoregression (VAR) model using a special Cholesky variance-covariance decomposition as a tool for risk scenario’s assessment. The proposed interpretation of the estimated matrix allows for the quantification of the impact of more than one shock and also to quantify spillovers. A VAR is estimated for each country (Colombia, Chile, Mexico, and Peru) in monthly frequency that includes China’s and Brazil’s EMBI, the global volatility index (VIX), plus the value of the dollar against a basket of currencies (Broad Index) and a proxy of the slope of the US Treasury yield curve (Spread US). The VIX and Broad Index shocks turn out to have a relatively homogenous effect on each country’s EMBI, while shocks to the China and Brazil EMBI are more heterogeneous. For the case of Chile, we further study three alternative risk scenarios, incorporating the copper price as an additional variable. The most disruptive scenario at the time when the shock hits is the “Volatility driven” one. Nevertheless, it is the “Emerging markets” scenario (namely one with simultaneous shocks to China’ and Brazil’s EMBI) the one with the most harmful dynamics, as it dyes out slower. Finally, a “Copper price bust” scenario, in which the price of copper drops significantly in addition to a shock to the EMBI China, is the one with the least effect as the price of copper is relatively less affected by shocks to other variables, displaying lower spillovers.
author ALFARO,RODRIGO
MEDEL,CARLOS A.
MORENO,CAROLA
author_facet ALFARO,RODRIGO
MEDEL,CARLOS A.
MORENO,CAROLA
author_sort ALFARO,RODRIGO
title AN ANALYSIS OF THE IMPACT OF EXTERNAL FINANCIAL RISKS ON THE SOVEREIGN RISK PREMIUM OF LATIN AMERICAN ECONOMIES
title_short AN ANALYSIS OF THE IMPACT OF EXTERNAL FINANCIAL RISKS ON THE SOVEREIGN RISK PREMIUM OF LATIN AMERICAN ECONOMIES
title_full AN ANALYSIS OF THE IMPACT OF EXTERNAL FINANCIAL RISKS ON THE SOVEREIGN RISK PREMIUM OF LATIN AMERICAN ECONOMIES
title_fullStr AN ANALYSIS OF THE IMPACT OF EXTERNAL FINANCIAL RISKS ON THE SOVEREIGN RISK PREMIUM OF LATIN AMERICAN ECONOMIES
title_full_unstemmed AN ANALYSIS OF THE IMPACT OF EXTERNAL FINANCIAL RISKS ON THE SOVEREIGN RISK PREMIUM OF LATIN AMERICAN ECONOMIES
title_sort analysis of the impact of external financial risks on the sovereign risk premium of latin american economies
publisher ILADES. Universidad Alberto Hurtado.
publishDate 2017
url http://www.scielo.cl/scielo.php?script=sci_arttext&pid=S0718-88702017000200131
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