How Sovereign is Sovereign Credit Risk

By Francis A. Longstaff, Jun Pan, Lasse Heje Pedersen, Kenneth J. Singleton. 2007

1,186 citations recorded by the source corpus.

We study the nature of sovereign credit risk using an extensive sample of CDS spreads for 26 developed and emerging-market countries. Sovereign credit spreads are surprisingly highly correlated, with just three principal components accounting for more than 50 percent of their variation. Sovereign credit spreads are generally more related to the U.S. stock and high-yield bond markets, global risk premia, and capital flows than they are to their own local economic measures. We find that the excess returns from investing in sovereign credit are largely compensation for bearing global risk, and that there is little or no country-specific credit risk premium. A significant amount of the variation in sovereign credit returns can be forecast using U.S. equity, volatility, and bond market risk premia.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/189421fa384b29326d6b9fbfd34d1e30421fd00a

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Citations in the corpus

Sovereign and corporate credit risk: Evidence from the Eurozone (2015, background): “…devoted to the financial sector where the sovereign-corporate link is expected to be tight: Banks benefit from government bailouts 1 Caceres, Guzzo, and Segoviano (2010), Longstaff et al. (2011), Dieckmann and Plank (2012) break down sovereign risk into systemic and country-specific components.”
The Dynamics of Spillover Effects during the European Sovereign Debt Turmoil (2014, neutral): “Longstaff et al. (2011) analyse the determinants of sovereign credit risk and divide them into local economic variables, global financial market variables, global risk premium, and net investment flows into global funds.”
NBER WORKING PAPER SERIES HOW THE SUBPRIME CRISIS WENT GLOBAL: EVIDENCE FROM BANK CREDIT DEFAULT SWAP SPREADS (2009, neutral): “HYS has also been found to be a significant explanatory variable of emerging market spread differences across countries and movements over time (see Eichengreen and Mody, 2000, and Longstaff et al., 2008, who find it to be the most potent of their candidate variables).”
Global financial conditions, country spreads and macroeconomic fluctuations in emerging countries (2013, positive): “The empirical evidence in Longstaff et al. (2011)) also suggests that global factors explain a large fraction of the variation in the international interest rate.”
The TIPS-treasury bond puzzle (2014, background): “There is an extensive literature on sovereign default risk including Duffie, Pederson, and Singleton (2003), Pan and Singleton (2008), Buraschi, Sener, and Mengütürk (2010), Longstaff et al. (2011), and many others.”
The Determinants of Sovereign Bond Yield Spreads in the EMU (2012, methodology): “These include macroeconomic and expected fiscal fundamentals, international risk, liquidity conditions and the risk of the crisis’ transmission among EMU member states, which we capture using principal components analysis as in Longstaff et al. (2011). We employ a panel of ten euro area countries (A”
Political Risk and International Valuation (2016, neutral): “…show that global and/or U.S. financial conditions are important drivers of variation in sovereign spreads (see Özatay et al., 2009; Gonzalez-Rozada and Levy-Yeyati, 2008; Maier and Vasishtha, 2008; Remolana et al., 2008; Pan and Singleton, 2008; Longstaff et al., 2011 using bond and CDS data).”
Sovereign Credit Ratings and Financial Markets Linkages: Application to European Data (2012, background): “In addition, given that sovereign spreads are generally highly correlated across countries (Longstaff et al. 2011), we attempt to control for changes in the EU market conditions by computing an adjusted measure of sovereign yields (and CDS) spreads.”
Walking Hand in Hand: Fiscal Policy and Growth in Advanced Economies (2012, positive): “Longstaff et al. (2011) show that sovereign credit risk can be linked to global factors, based on a dataset of 28 advanced and emerging economies over the period October 2000-January 2010.”