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Systemic Sovereign Credit Risk: Lessons from the U.S. and Europe

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  • Andrew Ang
  • Francis A. Longstaff

Abstract

We study the nature of systemic sovereign credit risk using CDS spreads for the U.S. Treasury, individual U.S. states, and major European countries. Using a multifactor affine framework that allows for both systemic and sovereign-specific credit shocks, we find that there is considerable heterogeneity across U.S. and European issuers in their sensitivity to systemic risk. U.S. and Euro systemic shocks are highly correlated, but there is much less systemic risk among U.S. sovereigns than among European sovereigns. We also find that U.S. and European systemic sovereign risk is 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16982.

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Date of creation: Apr 2011
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Publication status: published as Ang, Andrew & Longstaff, Francis A., 2013. "Systemic sovereign credit risk: Lessons from the U.S. and Europe," Journal of Monetary Economics, Elsevier, vol. 60(5), pages 493-510.
Handle: RePEc:nbr:nberwo:16982

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