The Pricing of Sovereign Risk and Contagion during the European Sovereign Debt Crisis
AbstractThe paper analyses the drivers of sovereign risk for 31 advanced and emerging economies during the European sovereign debt crisis. It shows that a deterioration in countries’ fundamentals and fundamentals contagion – a sharp rise in the sensitivity of financial markets to fundamentals – are the main explanations for the rise in sovereign yield spreads and CDS spreads during the crisis, not only for euro area countries but globally. By contrast, regional spillovers and contagion have been less important, including for euro area countries. The paper also finds evidence for herding contagion – sharp, simultaneous increases in sovereign yields across countries – but this contagion has been concentrated in time and among a few markets. Finally, empirical models with economic fundamentals generally do a poor job in explaining sovereign risk in the pre-crisis period for European economies, suggesting that the market pricing of sovereign risk may not have been fully reflecting fundamentals prior to the crisis.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9249.
Date of creation: Dec 2012
Date of revision:
Contact details of provider:
Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
Find related papers by JEL classification:
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Longitudinal Data; Spatial Time Series
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- F30 - International Economics - - International Finance - - - General
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-12-22 (All new papers)
- NEP-CBA-2012-12-22 (Central Banking)
- NEP-EEC-2012-12-22 (European Economics)
- NEP-IFN-2012-12-22 (International Finance)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Schmid, Kai Daniel & Schmidt, Michael, 2012. "EMU, the changing role of public debt and the revival of sovereign credit risk perception," University of Tuebingen Working Papers in Economics and Finance 48, University of Tuebingen, Faculty of Economics and Social Sciences.
- John Beirne & Jana Gieck, 2012. "Interdependence and contagion in global asset markets," Working Paper Series 1480, European Central Bank.
- Sven Steinkamp & Frank Westermann, 2012.
"On Creditor Seniority and Sovereign Bond Prices in Europe,"
CESifo Working Paper Series
3944, CESifo Group Munich.
- Sven Steinkamp & Frank Westermann, 2012. "On Creditor Seniority and Sovereign Bond Prices in Europe," Working Papers 92, Institute of Empirical Economic Research.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.