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Systemic sovereign credit risk: Lessons from the U.S. and Europe

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  • Ang, Andrew
  • Longstaff, Francis A.

Abstract

We study the nature of systemic sovereign credit risk using CDS spreads for the U.S. Treasury, individual U.S. states, and major Eurozone countries. Using a multifactor affine framework that allows for both systemic and sovereign-specific credit shocks, we find that there is much less systemic risk among U.S. sovereigns than among Eurozone sovereigns. We find that both U.S. and Eurozone systemic sovereign risk are strongly related to financial market variables. These results provide strong support for the view that systemic sovereign risk has its roots in financial markets rather than in macroeconomic fundamentals.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 60 (2013)
Issue (Month): 5 ()
Pages: 493-510

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Handle: RePEc:eee:moneco:v:60:y:2013:i:5:p:493-510

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Web page: http://www.elsevier.com/locate/inca/505566

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Cited by:
  1. V. De Bruyckere & M. Gerhardt & G. Schepens & R. Vander Vennet, 2012. "Bank/sovereign risk spillovers in the European debt crisis," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 12/828, Ghent University, Faculty of Economics and Business Administration.
  2. Filipović, Damir & Trolle, Anders B., 2013. "The term structure of interbank risk," Journal of Financial Economics, Elsevier, vol. 109(3), pages 707-733.
  3. Heinz Handler, 2013. "The Eurozone: Piecemeal Approach to an Optimum Currency Area," WIFO Working Papers 446, WIFO.
  4. Elettra Agliardi & Mehmet Pinar & Thanasis Stengos, 2013. "A Sovereign Risk Index for the Eurozone Based on Stochastic Dominance," Working Paper Series 58_13, The Rimini Centre for Economic Analysis.
  5. Ulrich Bindseil & Wolfgang Modery, 2011. "Ansteckungsgefahren im Eurogebiet und die Rettungsmaßnahmen des Frühling 2010," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 12(3), pages 215-241, 08.
  6. Winkler, Adalbert, 2013. "Der lender of last resort vor Gericht," Frankfurt School - Working Paper Series 206, Frankfurt School of Finance and Management.
  7. John Cotter & Davide Avino, 2014. "Sovereign and bank CDS spreads: two sides of the same coin?," Working Papers 201402, Geary Institute, University College Dublin.
  8. Zinna, Gabriele, 2013. "Sovereign default risk premia: Evidence from the default swap market," Journal of Empirical Finance, Elsevier, vol. 21(C), pages 15-35.
  9. Sibbertsen, Philipp & Wegener, Christoph & Basse, Tobias, 2014. "Testing for a break in the persistence in yield spreads of EMU government bonds," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 109-118.

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