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Emerging Market Sovereign Bond Spreads: Estimation and Back-testing

Emerging Market Sovereign Bond Spreads: Estimation and Back-testing by Fabio Comelli
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We estimate sovereign bond spreads of 28 emerging economies over the period January 1998-December 2011 and test the ability of the model in generating accurate in-sample predictions for emerging economies bond spreads. The impact and significance of country-specific and global explanatory variables on bond spreads varies across regions, as well as economic periods. During crisis times, good macroeconomic fundamentals are helpful in containing bond spreads, but less than in non-crisis times, possibly reflecting the impact of extra-economic forces on bond spreads when a financial crisis occurs. For some emerging economies, in-sample predictions of the monthly changes in bond spreads obtained with rolling regression routines are significantly more accurate than forecasts obtained with a random walk. Rolling regression-based bond spread predictions appear to convey more information than those obtained with a linear prediction method. By contrast, bond spreads forecasts obtained with a linear prediction method are less accurate than those obtained with random guessing.
International Monetary Fund; August 2012
43 pages; ISBN 9781475514315
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Title: Emerging Market Sovereign Bond Spreads: Estimation and Back-testing
Author: Fabio Comelli