How Sovereign Is Sovereign Credit Risk?
Author(s)Longstaff, Francis A.; Pan, Jun; Pederson, Lasse H.; Singleton, Kenneth J.
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We study the nature of sovereign credit risk using an extensive set of sovereign CDS data. We find that the majority of sovereign credit risk can be linked to global factors. A single principal component accounts for 64 percent of the variation in sovereign credit spreads. Furthermore, sovereign credit spreads are more related to the US stock and high-yield markets than they are to local economic measures. We decompose credit spreads into their risk premium and default risk components. On average, the risk premium represents about a third of the credit spread.
DepartmentSloan School of Management
American Economic Journal: Macroeconomics
American Economic Association
Longstaff, Francis A et al. “How Sovereign Is Sovereign Credit Risk?” American Economic Journal: Macroeconomics 3.2 (2011) : 75-103.
Author's final manuscript