Country credit risk determinants with model uncertainty

We analyze the economic and political determinants of country credit risk in both developed and emerging economies by using sovereign yield spreads as risk indicators. We document a high degree of model uncertainty and apply Bayesian Model Averaging to deal with this issue. GDP growth and external debt to GDP ratio are highly likely to influence default risk in emerging and developed economies. Inflation, import growth, openness, and trade freedom are additionally relevant in developed economies, whereas developing countries default risk is also influenced by debt service ratio, history of recent defaults, and the ratio of foreign exchange reserves to imports. (C) 2013 Elsevier Inc. All rights reserved.