THE ROLE OF GLOBAL RISK AVERSION IN EXPLAINING LATIN AMERICAN SOVEREIGN SPREADS

This paper explores the role of global risk aversion (GRA) and its main determinants, US economic growth and the US government bond yield, in explaining developments in Latin American sovereign spreads. We find that GRA is significant and positively related to Latin American sovereign spreads and that its impact varies across countries and over time. Those countries with the lowest risk, such as Chile, are more affected by GRA. Its relevance has also risen over time, particularly since the sharp change in the perception of risk stemming from the Enron scandal. Finally, an increase in both US economic growth and the US government bond yield are found to reduce sovereign spreads in most Latin American countries, while the opposite is true for US short-term interest rates.