An admissible term structure model of sovereign yield spreads with macro factors: The case of brazilian global bonds

Abstract

We study the term structure of Brazilian sovereign bond yield spreads and their links with the domestic economy using a macro-finance framework. Our model allows Brazilian macroeconomic variables as well as a latent country risk factor to affect sovereign spreads. We find that although the Brazilian sovereign yield spreads are dominated by the risk factor during the high default risk periods of 1999 and 2002, the effects of macro variables are significant during the rest of the estimation period. In addition, the volatility level of the macroeconomic system is driven by the country risk factor. © 2009 Blackwell Publishing Ltd and The University of Manchester.