Assessing the impacts of financial stress on the yield spreads of Poland, Mexico and South Africa

Abstract

This study employs a nonlinear vector autoregression (VAR) model and quantile-based analysis to examine the effects of the financial stress index (FSI) of developed countries and the exchange market pressure index (EMPI) on the USD-denominated yield spreads of Poland, Mexico, and South Africa. It was found by the nonlinear VAR that increases/decreases in the FSI of developed countries and in the EMPI raise/lower the yield spreads in each emerging country. Although different results are obtained among each emerging country, it was highlighted that foreign and domestic financial stress can be incorporated in the monetary policy formulation of the central banks of Poland, Mexico, and South Africa. Quantile analysis also revealed the role of different bond market pressure regimes in emerging countries, while the asymmetrical impacts of FSI and EMPI should be considered by the policymakers.