How Sovereign Is Sovereign Credit Risk?

Author(s)
Longstaff, Francis A.; Pan, Jun; Pederson, Lasse H.; Singleton, Kenneth J.
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Abstract
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.
Date issued
2011-04
URI
http://hdl.handle.net/1721.1/65581
Department
Sloan School of Management
Journal
American Economic Journal: Macroeconomics
Publisher
American Economic Association
Citation
Longstaff, Francis A et al. “How Sovereign Is Sovereign Credit Risk?” American Economic Journal: Macroeconomics 3.2 (2011) : 75-103.
Version: Author's final manuscript
ISSN
1945-7715
1945-7707
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