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Sovereign Asset Values and Implications for the Credit Market

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  • Posch, Peter N
  • Kalteier, Eva-Maria
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    Abstract

    Using the contingent claim approach and market data on sovereign credit default swaps we assess the drivers of a country s risk perception. Deriving market-based asset values for a set of advanced economies we gain insights into the capital markets perspectives on sovereign creditworthiness. We find the market-based asset values to be positively influenced by debt and to be an early risk indicator for economic developments. In a cross-section analysis we identify drivers of the economic risk of countries. Clustering the countries according to their debt to asset value ratios provides further insights into the market perceptions of sovereign credit risk. For example we find the asset values of countries with higher ratios react to changes in the global equity market. Countries with a lower ratio react more to the political stability within the country. --

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    Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79986.

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    Date of creation: 2013
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    Handle: RePEc:zbw:vfsc13:79986

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    1. Ericsson, Jan & Jacobs, Kris & Oviedo-Helfenberger, Rodolfo, 2004. "The Determinants of Credit Default Swap Premia," SIFR Research Report Series, Institute for Financial Research 32, Institute for Financial Research.
    2. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
    3. Caporale, Guglielmo Maria & Williams, Geoffrey, 2002. "Long-term nominal interest rates and domestic fundamentals," Review of Financial Economics, Elsevier, Elsevier, vol. 11(2), pages 119-130.
    4. Christian Keller & Peter Kunzel & Marcos Souto, 2007. "Measuring Sovereign Risk in Turkey," IMF Working Papers 07/233, International Monetary Fund.
    5. Andrew Berg & Jeffrey Sachs, 1988. "The Debt Crisis: Structural Explanations of Country Performance," NBER Working Papers 2607, National Bureau of Economic Research, Inc.
    6. Francis A. Longstaff & Jun Pan & Lasse H. Pedersen & Kenneth J. Singleton, 2011. "How Sovereign Is Sovereign Credit Risk?," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 75-103, April.
    7. Makram El-Shagi, 2010. "The role of rating agencies in financial crises: event studies from the Asian flu," Cambridge Journal of Economics, Oxford University Press, Oxford University Press, vol. 34(4), pages 671-685.
    8. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    9. Michael T. Gapen & Dale F. Gray & Cheng Hoon Lim & Yingbin Xiao, 2005. "Measuring and Analyzing Sovereign Risk with Contingent Claims," IMF Working Papers 05/155, International Monetary Fund.
    10. David Haugh & Patrice Ollivaud & David Turner, 2009. "What Drives Sovereign Risk Premiums?: An Analysis of Recent Evidence from the Euro Area," OECD Economics Department Working Papers 718, OECD Publishing.
    11. Hong G. Min, 1998. "Determinants of emerging market bond spread : do economic fundamentals matter?," Policy Research Working Paper Series 1899, The World Bank.
    12. Al-Sakka, Rasha & ap Gwilym, Owain, 2009. "Heterogeneity of sovereign rating migrations in emerging countries," Emerging Markets Review, Elsevier, Elsevier, vol. 10(2), pages 151-165, June.
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