Corporate credit spread puzzle in Latin america

Abstract

The phenomenon of corporate credit spreads in Latin America has become a topic of interest in the context of emerging markets, particularly in the aftermath of the 2008 financial crisis and the substantial increase in corporate bond issuance. This study analyses the macroeconomic determinants underlying these spreads, including GDP growth, primary balance, and monetary intervention rate, utilizing data from Brazil, Chile, Colombia, and Mexico between 2013 and 2023.

Utilizing sophisticated econometric and ARDL models, this study examines both the immediate and long-term relationships between these variables and corporate debt spreads. The study reveals that fluctuations in GDP have an inverse and substantial effect on spreads, whereas monetary policy demonstrates a direct and positive influence. While primary balance exhibits a more varied relationship across countries, its effects are notable in certain contexts.

The study emphasizes the importance of distinguishing between structural and cyclical distinctions between emerging and developed debt markets and highlights the pivotal role of macroeconomic stability and financial market depth. The findings of this study have implications for risk management, economic policy, and decision-making by investors and firms in emerging markets.