Forecasting Latin America's Country Risk Scores by Means of a Dynamic Diffusion Model

Abstract

Copyright © 2013 R. Cervelló-Royo et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. ; Over the last years, worldwide financial market instability has shaken confidence in global economies. Global financial crisis and changes in sovereign debts ratings have affected the Latin American financial markets and their economies. However, Latin American s relative resilience to the more acute rise in risk seen in other regions like Europe during last years is offering investors new options for improving risk-return trade-offs. Therefore, forecasting the future of economic situation involves high levels of uncertainty. The Country Risk Score (CRS) represents a broadly used indicator to measure the current situation of a country regarding measures of economic, political, and financial risk in order to determine country risk ratings. In this contribution, we present a diffusion model to study the dynamics of the CRS in 18 Latin American countries which considers both the endogenous effect of each country policies and the contagion effect among them. The model predicts quite well the evolution of the CRS in the short term despite the economic and political instability. Furthermore, the model reproduces and forecasts a slight increasing trend, on average, in the CRS dynamics for almost all Latin American countries over the next months. ; This work has been partially supported by the Spanish M.C.Y.T. Grants MTM2009-08587 as well as the Universitat Politecnica de Valencia Grant PAID06-11 (ref. 2070). ; Cervelló Royo, RE.; Cortés, J.; Sánchez Sánchez, A.; Santonja, F.; Villanueva Micó, RJ. (2013). Forecasting Latin America's Country Risk Scores by Means of a Dynamic Diffusion Model. Abstract and Applied Analysis. 2013:1-11. https://doi.org/10.1155/2013/264657 ; S ; 1 ; 11 ; 2013 ; Fernandez-Arias, E., & Montiel, P. J. (1996). The Surge in Capital Inflows ...