Article

International Capital Markets and Their Latin American Discontents

Christopher Balding

in The Oxford Handbook of Latin American Political Economy

Published in print May 2012 | ISBN: 9780199747504
Published online November 2012 | | DOI: http://dx.doi.org/10.1093/oxfordhb/9780199747504.013.0014

Series: Oxford Handbooks

 International Capital Markets and Their Latin American Discontents

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This article examines the relationship between electoral politics and credit default swaps (CDS) pricing. It presents research indicating that financial markets react to elections in Latin America, raising the cost of CDS, even when controlling for standard sovereign credit risk variables. Even for countries with sound public finances, financial markets can still swing rapidly when concerned by political events. Furthermore, supporting the suspicions of politicians that much of the volatility is driven by short-term investors, a distinct divergence emerges between long- and short-term instruments. While elections have a minimal, short-term, and frequently insignificant impact on the prices of ten-year CDS prices, they have a large, longer lasting, and statistically significant impact on the prices of one-year CDS. In other words, the existence of an election increases the basis point cost of a CDS and the perceived credit risk of that election. The perceived credit risk of Latin American governments is higher at an election, even after controlling for a range of economic and political variables. Finally, contagion effects in Latin America are economically and statistically significant.

Keywords: Latin American elections; electoral politics; credit default swaps; financial markets; market volatility

Article.  11310 words. 

Subjects: Economics ; Macroeconomics and Monetary Economics ; Financial Markets

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