Brazilian sovereign risk determinants: An analysis on the post-real plan period

Abstract

The country risk has a significant importance for the equity market of a specific country since it works as the tax indicator in that market. Granted, this subject’s importance, several international agencies try to measure it, e.g., JPMorgan that created EMBI+BR. In this research, we sought to identify its determinant factors in the post-real plan period. Initially, we analyzed the existence of structural breaks in the series, where three different breaks and four regimes were found. In this research, we sought to analyze 29 explanatory variables, five of which were selected via the stepwise method: two dummy variables (one for the American crisis and another one for the political crisis in 2004) and three other continuous variables: Current Transactions Balance, Exchange Rate, and Debt Balance to the IMF. The most relevant is the Exchange Rate when explaining the country risk. These five variables explain 86% of the Brazilian credit risk variation between November 2003 and December 2014.