THE IMPACT OF FISCAL POLICY IN AZERBAIJAN ON THE RISK PREMIUM OF SOVEREIGN BONDS

Abstract

This study empirically examines the impact of fiscal policy in our country on the risk premium of sovereign bonds issued by Azerbaijan in U.S. dollars. The risk premium is measured by the additional yield offered by the index containing these bonds over U.S. Treasury bonds (“OAS” or “Option-Adjusted Spread”), and this indicator reflects investors’ perception of the risk associated with the country’s foreign currency-denominated bonds. In the model, the budget balance-to-GDP ratio is selected as the main explanatory variable, while several other factors are included as control variables. Methodologically, the analysis is conducted within the framework of the ARDL model. The results indicate that the effect of the fiscal indicator is not statistically significant, whereas several other factors exert a stronger influence. The findings of the study have practical significance for preserving macro-financial stability by linking the fiscal, macroeconomic and global factors. In addition, the study contributes to the literature on both Azerbaijan and developing countries. At the same time, this work provides a broader analytical framework by demonstrating that the risk premium is shaped not only by domestic factors but also by external factors.