Geopolitical Risk and Emerging Markets Sovereign Risk Premia

Borradores de Economia
Number: 
1282
Published: 
Classification JEL: 
C22, F37, G15, G17
Keywords: 
Sovereign risk, credit default swaps, EMBI, Emerging Markets, geopolitical risk, Local projections

The most recent

Julián Alonso Cárdenas-Cárdenas, Deicy Johana Cristiano-Botia, Eliana Rocío González-Molano, Carlos Alfonso Huertas-Campos
Luis E. Arango, Juan José Ospina-Tejeiro, Fernando Arias-Rodríguez, Oscar Iván Ávila-Montealegre, Jaime Andrés Collazos-Rodríguez, Diana M. Cortázar Gómez, Juan Pablo Cote-Barón, Julio Escobar-Potes, Aarón Levi Garavito-Acosta, Franky Juliano Galeano-Ramírez, Eliana Rocío González-Molano, Maria Camila Gomez Cardona, Anderson Grajales, David Camilo López-Valenzuela, Wilmer Martinez-Rivera, Nicolás Martínez-Cortés, Rocío Clara Alexandra Mora-Quiñones, Sara Naranjo-Saldarriaga, Antonio Orozco, Daniel Parra-Amado, Julián Pérez-Amaya, José Pulido, Karen L. Pulido-Mahecha, Carolina Ramírez-Rodríguez, Sergio Restrepo Ángel, José Vicente Romero-Chamorro, Nicol Valeria Rodríguez-Rodríguez, Norberto Rodríguez-Niño, Diego Hernán Rodríguez-Hernández, Carlos D. Rojas-Martínez, Johana Andrea Sanabria-Domínguez, Diego Vásquez-Escobar
Luis Armando Galvis-Aponte, Adriana Isabel Ortega-Arrieta, Adriana Marcela Rivera-Zárate

Abstract

This study examines the determinants of sovereign risk, focusing on the impact of geopolitical risk in emerging market economies (EMEs) sovereign risk metrics. Using local projection techniques, we evaluate the effects of geopolitical risk on credit default swaps (CDS) and EMBI indices in EMEs, including the recent war between Ukraine and Russia. Our findings highlight the significance of considering geopolitical risk when analyzing risk premiums for emerging markets. Notably, we find that the impact of geopolitical risk shocks on CDS is higher than the effect on EMBI spread dynamics. Furthermore, using recursive estimations, we show that the effect of geopolitical risk on sovereign CDS and EMBI spreads has been relatively stable. On the other hand, we find an important degree of heterogeneity across countries by analyzing evidence from individual countries. Some countries in our sample seem statistically unaffected by geopolitical risk, particularly when examining EMBI dynamics.