Impact of COVID-19 on sovereign risk: Latin America versus Asia

This paper examines the impact of changes in the pandemic restrictions on the market perception of sovereign risk in selected Latin American and Asian economies. We measure the risk by the sovereign bond spreads. Within the Markov switching modelling, we find that imposing the restrictions in Asian countries, apart from China, was accompanied by the increase in bond spreads, but only in the high volatility regime. The causality approach demonstrates various asymmetric causality patterns between stringency index and bond spreads. Most often, the rise in stringency indices contributed to the increase of the spreads or their volatility.