Impact of Financial Fragility on Sovereign Bond Spreads: An Empirical Analysis for BRICs Region

Abstract

The paper investigates the impact of financial fragility on the sovereign bond spreads of the four rapidly rising emerging economies Brazil, Russia, India and China (BRICs). Using fixed effect model, a comparison is being made among different models after including and excluding Financial Stress Index (FSI) from the base line model. The results suggest that financial fragility is a major determinant of sovereign bond spreads than other macroeconomic factors as it appears to be highly significant in all estimations. Moreover it has been observed that by adding FSI, the explanatory power of the model has increased quite prominently. The significance of FSI depicts the importance of idiosyncratic financial environment in financing conditions of BRICs by showing the transmission of financial stress through financial and economic linkages. The results also indicate the importance of local factors in explaining the sovereign bond spreads of BRICs economies that is in conforming to past studies. Keywords: Fragility, Bonds, Trade, Public Debt, Financial markets, Interest Rates