Fundamentals, credit ratings and global indicators: what determines Turkish sovereign spreads?

Abstract

This thesis analyzes empirically the determinants of Turkish sovereign risk asproxied by J.P. Morgan̕s Turkish Composite Emerging Market Bond Index spread forperiod 1997-2005. Specifically, the thesis explores the relative importance of country specific fundamentals, called the "pull" factors, compared to global liquidity conditions,called the "push" factors, in explaining the movements in the Turkish sovereign spreads.We use Turkish credit ratings and alternatively a number of macro-variables to accountfor the pull factors. We also use the stance and predictability of the U.S. monetary policy as an important indicator of global financial climate. Specifically, making use of effectivefederal funds rate and the federal funds futures rate, we decompose the U.S. monetary policy into its anticipated and unanticipated components. We also extend the analysis to apanel of 15 emerging market country spreads. We uncover that sovereign ratings or fundamentals and the volatility of global liquidity conditions not the level of globalliquidity conditions are significant in explaining the movements in the Turkish and other14 emerging market countries sovereign spreads. To understand when the unanticipated component became insignificant, we estimate rolling and recursive regressions andconclude that due to Federal Reserve Open Market Committee̕s policy change in releasing the statement in February 1994, unanticipated component becomesinsignificant.