About this Journal Submit a Manuscript Table of Contents
Abstract and Applied Analysis
Volume 2013 (2013), Article ID 264657, 11 pages
http://dx.doi.org/10.1155/2013/264657
Research Article

Forecasting Latin America’s Country Risk Scores by Means of a Dynamic Diffusion Model

1Department of Economics and Social Sciences, Universitat Politècnica de València, 46022 Valencia, Spain
2Institute for Multidisciplinary Mathematics, Universitat Politècnica de València, 46022 Valencia, Spain
3Departament of Statistics and Operations Research, Universitat de València, Burjassot, 46100 Valencia, Spain

Received 3 June 2013; Accepted 20 November 2013

Academic Editor: Benito Chen-Charpentier

Copyright © 2013 R. Cervelló-Royo et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

Over the last years, worldwide financial market instability has shaken confidence in global economies. Global financial crisis and changes in sovereign debts ratings have affected the Latin American financial markets and their economies. However, Latin American’s relative resilience to the more acute rise in risk seen in other regions like Europe during last years is offering investors new options for improving risk-return trade-offs. Therefore, forecasting the future of economic situation involves high levels of uncertainty. The Country Risk Score (CRS) represents a broadly used indicator to measure the current situation of a country regarding measures of economic, political, and financial risk in order to determine country risk ratings. In this contribution, we present a diffusion model to study the dynamics of the CRS in 18 Latin American countries which considers both the endogenous effect of each country policies and the contagion effect among them. The model predicts quite well the evolution of the CRS in the short term despite the economic and political instability. Furthermore, the model reproduces and forecasts a slight increasing trend, on average, in the CRS dynamics for almost all Latin American countries over the next months.