In this article, we analyse how much of the reduction in emerging markets spreads can be ascribed to specific factors - linked to the improvement in the 'fundamentals' of a given country - rather than to common factors - linked to global liquidity conditions and agents' degree of risk aversion. By means of factor analysis, we find that a single common factor is able to explain a large part of the co-variation in emerging market economies spreads observed in the last four years; on its turn, this common factor might be traced back mainly to financial markets volatility. Due to the particularly benign global financial conditions in recent years, spreads seem to have declined to levels lower than those warranted by improved fundamentals. As a consequence, EMEs do remain vulnerable to sudden shift in financial market conditions.
Published in 2009 in: Journal of International Financial Markets, Institutions & Money, v. 19, 2, pp. 222-239
