Co-movement of Political Risk and Sovereign Credit Risk: A Wavelet Coherence Analysis for Argentina, Brazil and Venezuela

Using wavelet coherence methodology, this research explores co-movement between sovereign credit risk and political risk in Argentina, Brazil and Venezuela. The empirical outcomes reveal an existence of co-movements between political risk and sovereign credit ratings in different scales and directions. For example, sovereign ratings significantly cause political risk in Argentina from 1997 to 2005, where a deep economic crisis caused political instability. However, an established political stability leads changes in credit ratings between 2008 and 2015. Brazil is a case where we do not observe a strong linkage between political risk and sovereign ratings with few weak and short exceptional periods. Venezuela is a special case where we pointed out the fact that political risk significantly causes changes in sovereign credit risk ratings in a material part of the period under investigation. Though this analysis is not a back-testing to argue that the sovereign credit risk ratings are directly driven by political risk, empirical results show that political risk causes dramatic deteriorations in sovereign credit risk in Venezuela throughout the examination period at different scales.

The empirical outcomes reveal an existence of co-movements between political risk and sovereign credit ratings in different scales and directions. For example, sovereign ratings significantly cause political risk in Argentina from 1997 to 2005, where a deep economic crisis caused political instability. However, an established political stability leads changes in credit ratings between 2008 and 2015. Brazil is a case where we do not observe a strong linkage between political risk and sovereign ratings with few weak and short exceptional periods. Venezuela is a special case where we pointed out the fact that political risk significantly causes changes in sovereign credit risk ratings in a material part of the period under investigation. Though this analysis is not a back-testing to argue that the sovereign credit risk ratings are directly driven by political risk, empirical results show that political risk causes dramatic deteriorations in sovereign credit risk in Venezuela throughout the examination period at different scales.