The Pricing of Sovereign Risk and Contagion During the European Sovereign Debt Crisis

By J. Beirne, Marcel Fratzscher. Social Science Research Network, 2013

556 citations recorded by the source corpus.

The paper analyses the drivers of sovereign risk for 31 advanced and emerging economies during the European sovereign debt crisis. It shows that a deterioration in countries' fundamentals and fundamentals contagion – a sharp rise in the sensitivity of financial markets to fundamentals – are the main explanations for the rise in sovereign yield spreads and CDS spreads during the crisis, not only for euro area countries but globally. By contrast, regional spillovers and contagion have been less important, including for euro area countries. The paper also finds evidence for herding contagion – sharp, simultaneous increases in sovereign yields across countries – but this contagion has been concentrated in time and among a few markets. Finally, empirical models with economic fundamentals generally do a poor job in explaining sovereign risk in the pre-crisis period for European economies, suggesting that the market pricing of sovereign risk may not have been fully reflecting fundamentals prior to the crisis.

Subfields: Finance, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/fb9c9b5c76e735f3090f5763387452fd637081d3

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Citations in the corpus

Feeling the Heat: Climate Risks and the Cost of Sovereign Borrowing (2021, background): “Beirne and Fratzscher (2013) find in a study of 31 advanced and emerging economies”
The Dynamics of Spillover Effects during the European Sovereign Debt Turmoil (2014, unknown): “Berndt and Obreja (2010) study the determinants of European corporate CDS returns and identify as one of the main common factors the super-senior tranche of the iTraxx Europe index, referred to as “the economic catastrophe risk”.”
Intra- and inter-regional return and volatility spillovers across emerging and developed markets: Evidence from stock indices and stock index futures (2016, background): “…research to the literature is the investigation of volatility spillovers in the sample which is not restricted only to developed markets (see, e.g., Beirne & Fratzscher, 2013; Beirne et al, 2013; Cho, Hyde & Nguyen, 2014; Diebold & Yilmaz, 2009, 2012; Singh, Kumar & Pandey, 2010; Syriopoulos,…”
The impact of monetary policy announcements on the stock price of large European banks during the financial crisis (2015, methodology): “As usual in the literature (see, for example Beirne and Fratzscher, 2013), we convert the alphabetic code of ratings in numbers, so that higher values indicate more risk.”
Credit Default Swaps: A Survey (2014, background): “A different explanation for the co-movement in sovereign spreads is given by Benzoni et al. [2012], who suggest that, after negative countryspecific shocks, agents revise their beliefs about the default probabilities of all countries, which, in turn, causes greater credit spread correlations than if”
This Changes Everything (2020, background): “More specifically, the economics literature suggests that government’s borrowing costs depend on macroeconomic fundamentals and institutional factors (Attinasi and others, 2009; Afonso 2010; Poghosyan, 2012; Beirne and Fratzscher, 2013; Afonso and Nunes, 2015; Godl and Kleinert, 2016; de Grauwe, Ji ”