An Empirical Analysis of the Co-Movement Among Spreads on Emerging-Market Debt

This paper investigates the behaviour, from October 1999 to May 2001, of spreads on sovereign debt issuance from 15 countries located in Asia, Latin America and Eastern Europe using a homogeneous secondary market database. The research integrates standard Principal Components Analysis procedures with a VAR impulse response investigation. The latter provides information which is instrumental for the economic interpretation of the Principal Components. Convincing evidence is found of spread co-movements, within and across geographical areas, possibly due to cross-market quot;contagionquot; phenomena. Latin American and Asiatic spreads seem to be somehow interlinked whereas Eastern European spreads, but for the Turkish one, seem to react to idiosyncratic factors only. Our findings suggest that portfolio managers should take their investment decisions according to both cross-market and cross-(geographical) area diversification rules. At the same time emerging market countries should be aware of the danger of sudden capital outflows due to regional contagion