Political Risk and Sovereign Spreads in Latin America

2016. Academia Revista Latinoamericana de Administracion. Vol. 29, N° 2, Pp 165-180

Erwin Hansen S, Jennifer Zegarra

Abstract:

Purpose – The purpose of this paper is to explore the relationship between six different dimensions of political risk in a country and its spread for a sample of 12 Latin American countries. Design/methodology/approach – The methodology applied consists of panel estimators with fixed effects. In addition, a panel data model with instrumental variables is considered to tackle with potential problems of endogeneity in the model. Findings – The results show there is a strong positive relationship between political risk and sovereign spread in Latin America, i.e., greater political risk is associated with greater sovereign spread. This effect is particularly significant when the political risk is associated with a weak rule of law or low-quality regulation in the country. Research limitations/implications – The main limitation of this study concerns the potential risks of endogeneity which might exist between sovereign risk and political risk measures, which may not have been completely eliminated with the econometric methodology used. Originality/value – This paper contributes to the literature of sovereign risk by studying the dimension of political risk in detail. Specifically, six dimensions of political risk are studied. Additionally, it provides empirical evidence, including the 2008 financial crisis period, regarding the determinants of spreads on Latin American economies. Keywords Political risk, Global financial crisis, Rule of law, Latin American economies, Regulatory quality, Sovereign spreads Paper type Research paper

Palabras claves: Political Risk, Sovereign Spreads, Latin-American Economies, Global Financial Crisis, Rule of Law, Regulatory Quality

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