On the political determinants of sovereign risk: Evidence from a Markov-switching vector autoregressive model for Argentina

While empirical sovereign credit risk models have portrayed default as driven mainly by economic and financial risk factors, this investigation addresses the relative importance of political risk that the empirical literature has often overlooked. A Markov-switching vector autoregressive model is applied to data from the Republic of Argentina to assess the timing and thresholds of the dynamic system. Results show the significance of political factors in explaining sovereign risk for Argentina, and demonstrate the feasibility and value of the proposed methodology.

► Economic and financial factors mainly used in sovereign risk models for default. ► This paper addresses the often overlooked importance of political risk. ► A Markov-Switching VAR is applied to data from the Republic of Argentina. ► The MS-VAR is used to assess the timing and thresholds of the dynamic system. ► Results show the significance of political factors on sovereign risk for Argentina.