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Review of Finance Advance Access published online on March 5, 2008
Review of Finance, doi:10.1093/rof/rfn004
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The Author 2008. Published by Oxford University Press on behalf of the European Finance Association. All right reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

Understanding common factors in domestic and international bond spreads

Rodolfo Martell*

Emerging Markets Research, Barclays Global Investors

I study the determinants of changes in credit spreads for U.S. dollar denominated domestic and foreign sovereign bonds using fundamentals specified by structural models to separate spreads into their credit and non-credit components. I find that the non-default portions of spreads have a component that is common for each type of debt. Further, using a vector autoregressive model, I find that domestic spreads are related to the lagged component of sovereign spreads. I also find that some proxies for liquidity are related to the common components, suggesting a liquidity-based explanation for the common component not identified by previous research.

JEL Classification: G10, G15, G19

* I am grateful to Mike Cooper, David Denis, Diane Denis, Jean Helwege, Andrew Karolyi, Francis Longstaff, John McConnell, Bernadette Minton, Raghu Rau and seminar participants at Ohio State, Purdue, Drexel, Fordham, University of Miami, University of Virginia, University of Vienna, Queen's University and the 2005 AFA meetings for comments. I am especially grateful to my advisor, René Stulz. All errors are my own responsibility.


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