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Pricing of Sovereign Credit Risk

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Author Info

  • C. Emre Alper
  • Lorenzo Forni
  • Marc Gerard

Abstract

We investigate the pricing of sovereign credit risk over the period 2008-2010 for selected advanced economies by examining two widely-used indicators: sovereign credit default swap (CDS) and relative asset swap (RAS) spreads. Cointegration analysis suggests the existence of an imperfect market arbitrage relationship between the cash (RAS) and the derivatives (CDS) markets, with price discovery taking place in the latter. Likewise, panel regressions aimed at uncovering the fundamental drivers of the two indicators show that the CDS market, although less liquid, has provided a better signal for sovereign credit risk during the period of the recent financial crisis.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/24.

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Length: 27
Date of creation: 01 Jan 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/24

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Related research

Keywords: Credit risk; Developed countries; Global Financial Crisis 2008-2009; Risk premium; Sovereign debt; bond; arbitrage; bonds; credit risk; stock prices; government_bonds; derivatives market; government bonds; stock market; emerging markets; derivatives markets; bond spreads; bond purchases; government bond; risk aversion; sovereign bond; bond_purchases; money market; bond yields; bond market; bond markets; stock market index; benchmark government bond; term bond; stock market volatility; financial stability; bond yield; financial institutions; long-term bond market; corporate bond; risk premium; financial markets; coupon bond; bond estimators; money market rate; government bond yields; government bond yield; international financial statistics; emerging market bond; financial sector; money market rates; market bond; stock markets; money market interest rate; money market interest; outstanding bonds;

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References

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  1. Virginie Coudert & Mathieu Gex, 2011. "The Interactions Between the Credit Default Swap and the Bond Markets in Financial Turmoil," Working Papers 2011-02, CEPII research center.
  2. Roberto Blanco & Simon Brennan & Ian W. Marsh, 2005. "An Empirical Analysis of the Dynamic Relation between Investment-Grade Bonds and Credit Default Swaps," Journal of Finance, American Finance Association, vol. 60(5), pages 2255-2281, October.
  3. Norden, Lars & Weber, Martin, 2004. "The comovement of credit default swap, bond and stock markets: An empirical analysis," CFS Working Paper Series 2004/20, Center for Financial Studies (CFS).
  4. Joseph Gagnon & Matthew Raskin & Julie Remache & Brian Sack, 2010. "Large-scale asset purchases by the Federal Reserve: did they work?," Staff Reports 441, Federal Reserve Bank of New York.
  5. Miguel A. Segoviano Basurto & Carlos Caceres & Vincenzo Guzzo, 2010. "Sovereign Spreads," IMF Working Papers 10/120, International Monetary Fund.
  6. Christopher J. Neely, 2010. "The large scale asset purchases had large international effects," Working Papers 2010-018, Federal Reserve Bank of St. Louis.
  7. Fontana, Alessandro & Scheicher, Martin, 2010. "An analysis of euro area sovereign CDS and their relation with government bonds," Working Paper Series 1271, European Central Bank.
  8. Edda Zoli & Silvia Sgherri, 2009. "Euro Area Sovereign Risk During the Crisis," IMF Working Papers 09/222, International Monetary Fund.
  9. Eric M. Engen & R. Glenn Hubbard, 2004. "Federal Government Debt and Interest Rates," NBER Working Papers 10681, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Daniel Kapp, 2012. "The optimal size of the European Stability Mechanism: A cost-benefit analysis," DNB Working Papers 349, Netherlands Central Bank, Research Department.
  2. Elif Arbatli & C. Emre Alper & Jiri Jonas & Anke Weber & Marc Gerard & Tidiane Kinda & Giovanni Callegari & Anna Shabunina & Andrea Schaechter & Carlos Caceres, 2012. "A toolkit for Assessing Fiscal Vulnerabilities and Risks in Advanced Economies," IMF Working Papers 12/11, International Monetary Fund.
  3. Enrique Alberola & Luis Molina & Pedro del Río, 2012. "Boom-bust cycles, imbalances and discipline in Europe," Banco de Espa�a Working Papers 1220, Banco de Espa�a.
  4. Laura Jaramillo & Carlo Cottarelli, 2012. "Walking Hand in Hand," IMF Working Papers 12/137, International Monetary Fund.
  5. Patrick Augustin, 2012. "Sovereign Credit Default Swap Premia," Working Papers 12-10, New York University, Leonard N. Stern School of Business, Department of Economics.

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