The determinants of default risk in Brazil

We formulated a general unrestricted model of the Brazilian Emerging Markets Bond Index Plus (EMBI+) spreads, a proxy for the country's default risk. Employing algorithms that perform automated model selection, we found that macroeconomic fundamentals, such as current account deficit ratio to gross domestic product, public deficit ratio to gross domestic product and imports over foreign exchange reserves, can explain a great part of the variation in EMBI+ spreads. There is also robust evidence of systematic contagion from Argentina and Mexico and that the variance of the spread also affects its mean.