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Sovereign default risk premia: Evidence from the default swap market

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  • Zinna, Gabriele
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    Abstract

    This study explores the risk premia embedded in sovereign default swaps using a term structure model. The risk premia remunerate investors for unexpected changes in the default intensity. A number of interesting results emerge from the analysis. First, the risk premia contribution to spreads decreases over the sample, 2003–07, and rebounds at the start of the ‘credit crunch.’ Second, daily risk premia co-move with US macro variables and corporate default risk. Third, global factors explain most of Latin American countries' premia, and local factors best explain European and Asian premia. The importance of global factors grows over time. Finally, conditioning on lagged local and global variables at a weekly frequency, sovereign risk premia are highly predictable.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Empirical Finance.

    Volume (Year): 21 (2013)
    Issue (Month): C ()
    Pages: 15-35

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    Handle: RePEc:eee:empfin:v:21:y:2013:i:c:p:15-35

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    Web page: http://www.elsevier.com/locate/jempfin

    Related research

    Keywords: Emerging markets; Default risk; Credit default swaps; Term structure models; Kalman filter;

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    References

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