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Sovereign Credit Risk, Macroeconomic Dynamics, And Financial Contagion: Evidence From Japan

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  • Qian, Zongxin
  • Wang, Wendun
  • Ji, Kan

Abstract

We try to understand the nature of Japan's sovereign credit risk by examining the interaction between Japan's sovereign credit default swap (CDS) spreads and its financial indicators of macroeconomic fundamentals. We consider potential contagion from the global financial market and allow for reverse causality between CDS spreads and macroeconomic fundamentals. We find strong evidence of contagion from global stock markets to Japan's credit market when Lehman Brothers collapsed, whereas the European sovereign debt crisis only had temporary effects. We also show that several credit events, such as the 2011 Tohoku earthquake and rating cuts by rating agencies, significantly raised volatility in Japan's sovereign CDS market.

Suggested Citation

  • Qian, Zongxin & Wang, Wendun & Ji, Kan, 2017. "Sovereign Credit Risk, Macroeconomic Dynamics, And Financial Contagion: Evidence From Japan," Macroeconomic Dynamics, Cambridge University Press, vol. 21(8), pages 2096-2120, December.
    • Handle: RePEc:cup:macdyn:v:21:y:2017:i:08:p:2096-2120_00
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    Cited by:

    1. Umurcan Polat, 2017. "Regime Switching Determinants of Sovereign CDS Spreads: Evidence from Turkey," Eurasian Journal of Economics and Finance, Eurasian Publications, vol. 5(4), pages 124-141.
    2. Brzoza-Brzezina, Michał & Kotłowski, Jacek, 2020. "The Nonlinear Nature Of Country Risk And Its Implications For Dsge Models," Macroeconomic Dynamics, Cambridge University Press, vol. 24(3), pages 601-628, April.
    3. Jinho Choi & Alexander den Ruijter & Kimi Xu Jiang & Edmund Moshammer, 2022. "Japan’s sovereign rating in the post-pandemic era," Working Papers 52, European Stability Mechanism.

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