Long-run determinants of sovereign bond index in emerging market: New evidence from asymmetric and nonlinear pass-through

In this paper, we study the asymmetric long-run and short-run determinants of the sovereign bond index, a proxy of sovereign default, for two typical emerging countries: Turkey and Brazil over the 2000Q1-2011Q4 period. The determinants of the sovereign bond index are estimated by three macroeconomic factors: the current account, the external debt and international reserves. In particular, we use the positive and negative partial sum decomposition of the current account to determine the asymmetric effects on the sovereign bond index. Our findings can be summarized as follows: i, An asymmetric long-run relationship exists between the sovereign bond index and the explanatory variables for the following models. Only the long-run effect is asymmetric for Turkey while both short-run and long-run effects are asymmetric for Brazil. ii, The positive and negative shocks on the current account are more significant than a shock on international reserves to reduce the sovereign default risk for Turkey. iii, A negative shock on the current account is stronger than a positive one for Brazil.