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Sovereign Default Risk and the U.S. Equity Market

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  • Jeanneret, Alexandre

Abstract

This paper develops a two-country asset pricing model with defaultable firms and governments. This model shows that higher sovereign credit risk in a country depresses equity prices internationally and increases their volatility. The effect is strongest during adverse economic conditions and when firms are close to financial distress. A structural estimation provides evidence that sovereign default risk in Europe affects European and U.S. stock markets through the threat of an economic slowdown.

Suggested Citation

  • Jeanneret, Alexandre, 2017. "Sovereign Default Risk and the U.S. Equity Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(1), pages 305-339, February.
    • Handle: RePEc:cup:jfinqa:v:52:y:2017:i:01:p:305-339_00
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    Cited by:

    1. To, Thomas Y. & Wu, Eliza & Zhang, Lambert, 2022. "Mind the sovereign ceiling on corporate performance," Journal of Corporate Finance, Elsevier, vol. 75(C).
    2. Sandro C. Andrade & Vidhi Chhaochharia, 2018. "The Costs of Sovereign Default: Evidence from the Stock Market," The Review of Financial Studies, Society for Financial Studies, vol. 31(5), pages 1707-1751.
    3. Andrade, Sandro C. & Ekponon, Adelphe & Jeanneret, Alexandre, 2023. "Sovereign risk premia and global macroeconomic conditions," Journal of Financial Economics, Elsevier, vol. 147(1), pages 172-197.
    4. Jeanneret, Alexandre, 2018. "Sovereign credit spreads under good/bad governance," Journal of Banking & Finance, Elsevier, vol. 93(C), pages 230-246.
    5. Dim, Chukwuma & Koerner, Kevin & Wolski, Marcin & Zwart, Sanne, 2022. "Hot off the press: News-implied sovereign default risk," EIB Working Papers 2022/06, European Investment Bank (EIB).

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