The Bank for International Settlements published a working paper examining how geopolitical risk affects sovereign risk premia in emerging market economies. Using monthly data for 13 emerging markets from January 2005 to October 2025, the paper finds that higher geopolitical risk increases both five-year sovereign credit default swap spreads and JPMorgan Emerging Markets Bond Index spreads, with sovereign CDS spreads reacting more strongly because they are more liquid and more widely used for hedging. The paper also finds that anticipated geopolitical threats have a larger and more persistent effect on sovereign risk premia than realised geopolitical acts, particularly in EMBI spreads, indicating that bond markets reprice sovereign risk before events fully materialise. It further concludes that transmission is state dependent and becomes stronger when macro-financial conditions worsen, including tighter financial conditions, weaker commodity terms of trade for net-importing emerging markets and greater co-movement in sovereign risk. In the comparison around Russia's invasion of Ukraine, the post-invasion macro-financial configuration amplified the response of both CDS and EMBI spreads relative to the pre-invasion phase.
Bank for International Settlements2026-07-15
Bank for International Settlements working paper finds geopolitical threats raise emerging market sovereign risk premia more than realised events
The Bank for International Settlements published research finding that higher geopolitical risk raises emerging market sovereign CDS and EMBI spreads, with CDS reacting more strongly. The paper finds geopolitical threats have a larger and longer-lasting effect than realised events, and that the impact is amplified when financial stress rises, commodity terms of trade worsen for net-importing economies and sovereign risks move more closely together.