Modeling the sovereign spreads via threshold cointegration: evidence from Brazil



Linha de Pesquisa
Administração e Economia de Negócios

Beatriz Vaz de Melo Mendes, Claudio Cardoso Flores



WSEAS Transactions on Business and Economics, v. 12, pp. 354-362. Abstract: This paper analyses the dynamics of the Brazilian sovereign spread and its statistically significant connection with some selected variables by applying linear and threshold cointegration methods. We statistically test the effects of the recent subprime crisis finding strong equilibrium relations, stable enough to exhibit cointegrated behavior before and after the subprime crisis. The assumption of a threshold, linked to a certain level of market risk aversion, refines the methodology and brings flexibility to the modeling strategy. The final VECM model indicates the External debt and the volatility index VIX as the key drivers of the Brazilian sovereign spread. The findings suggest that, with the onset of the crisis, an automatic mechanism of adjustment between the spread and the VIX came into play while the market experimented an increasing risk aversion feeling. It becomes clear from the results that current beliefs on the economic fundamentals are not sufficient to deal with the market turbulence under a global crisis. We propose a methodology for assessing the robustness of the optimal threshold solution.

Rolar para cima