Abstract
This thesis uses data from twelve emerging markets economies (EMEs) to explain the determinants of EMEs dollar-denominated sovereign bonds spreads by using an econometric model that estimates the fair value of sovereign debt. This model employs macroeconomic fundamentals and high-frequency Variables (HFVs). A cointegration technique was used to find the relationship between EMEs spreads and macroeconomic variables (i.e., real GDP growth, change in terms of trade, and investors’ risk aversion). Afterwards, two HFVs were introduced—commodity index and U.S. 10-year Treasury bond yield—to examine short-term deviation of spreads from the equilibrium by using an error correction model. The model predictive value is evaluated by examining the predicted value of the model vs. the actual value through back testing of in-sample and out-of-sample data points. The best specification model produced close to 62 percent hit ratio coming from trading triggers that are at least one standard deviation away from the mean.