Analyzing the Determinants of Country Default Risk by Bayesian Model Averaging

The paper analyzes economic determinants of country default risk in emerging markets,

reflected by sovereign yield spreads. In a short literature review, we show that the results

reported so far are heterogeneous with respect to significant explanatory variables. This

could indicate a high degree of uncertainty about the “true” regression model. We use

Bayesian Model Averaging as the model selection method, in order to find the variables

which are most likely to determine credit risk. We document that total debt, history of recent

default, trade balance and the level of currency reserves are among the most important

variables determining credit risk.