Assessing the risk premium determinants in less developed countries: the case of Latin American economies

Mar del Plata

Conferencia; REUNION ANUAL; 2011

Universidad Nacional de Mar del Plata

This paper assesses the main determinants of the risk premium within a group of selected Latin American Countries (LACs). Following Gertler and Rogoff (1990) we suppose that the risk premium in small open economies affected by moral hazard in credit markets depends negatively on the size of the collateral (i.e. natural resources) that guarantee the liabilities. We apply a FGLS panel regression for two different samples of LACs (nine countries during 1977-2008 and fourteen economies in 1984-2008) and find that risk premium is negatively correlated with permanent terms-of-trade shocks and wealth, which helps to explain (at least partially) the so-called Lucas Paradox