The Determinants of Sovereign Bond Credit Spreads Changes
by Michael Westphalen of HEC, Université de Lausanne, & Fame
November 30, 2001
Abstract: This paper aims to find the determinants of changes in credit spreads of sovereign bonds. We examine structural models of sovereign credit risk and identify variables which we expect to explain variation in sovereign credit spreads. Estimation of the model shows statistical significance and the predicted signs. However, the model fails to explain a great part of the variation in sovereign credit spreads. Principal Components Analysis reveals that one common factor is responsible for most of the variation in credit spreads.