Modelling the Sovereign Linkages of Key Latin American Economies

This paper models the cross-market dynamics in an emerging market regional setting using a homogenous set of international sovereign bonds issued by key Latin American economies. We employ Johansen’s and a modified three-step procedure, which generates portfolio adjustment weights while accounting for common volatility effects across markets. The bonds are grouped based upon maturities across different markets in the Latin American region. This paper provides insights into the nature of sovereign linkages of key Latin American markets generally, and sovereign international bonds with varying maturities more specifically. The empirical results also highlight the manner in which sovereign linkages evolve in Latin America and the required portfolio adjustments following a credit event in the region.