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Contagion of fear: Is the impact of COVID‐19 on sovereign risk really indiscriminate?

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  • Serhan Cevik
  • Belma Öztürkkal

Abstract

This paper investigates the impact of infectious diseases on the evolution of sovereign credit default swap (CDS) spreads for a panel of 77 countries. Using annual data over 2004–2020, we find that infectious‐disease outbreaks have no discernible effect on CDS spreads, after controlling for macroeconomic and institutional factors. However, a granular analysis using high‐frequency data indicates that the COVID‐19 pandemic has had a significant impact on CDS spreads. This adverse effect appears to be more pronounced in advanced economies, which may reflect the greater severity of the pandemic and depth of the economic crisis in these countries, at least during the initial stage of the outbreak, as well as underreporting in developing countries due to differences in testing availability and institutional capacity. While more stringent containment measures help lower sovereign CDS spreads, the fiscal burden of these efforts could undermine credit worthiness and eventually push the cost of borrowing higher.

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  • Serhan Cevik & Belma Öztürkkal, 2021. "Contagion of fear: Is the impact of COVID‐19 on sovereign risk really indiscriminate?," International Finance, Wiley Blackwell, vol. 24(2), pages 134-154, August.
    • Handle: RePEc:bla:intfin:v:24:y:2021:i:2:p:134-154
    DOI: 10.1111/infi.12397
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    2. Gül Huyugüzel Kışla & Y. Gülnur Muradoğlu & A. Özlem Önder, 2022. "Spillovers from one country’s sovereign debt to CDS (credit default swap) spreads of others during the European crisis: a spatial approach," Journal of Asset Management, Palgrave Macmillan, vol. 23(4), pages 277-296, July.
    3. Claudiu Tiberiu Albulescu & Eugenia Grecu, 2023. "Government Interventions and Sovereign Bond Market Volatility during COVID-19: A Quantile Analysis," Mathematics, MDPI, vol. 11(5), pages 1-14, February.
    4. Capraru, Bogdan & Georgescu, George & Sprincean, Nicu, 2023. "Fiscal Rules, Independent Fiscal Institutions, and Sovereign Risk," Working Papers of Romania Fiscal Council 230201, Romania Fiscal Council.
    5. Guglielmo Maria Caporale & Abdurrahman Nazif Çatık & Mohamad Husam Helmi & Coşkun Akdeniz & Ali İlhan, 2024. "Time-varying effects of the COVID-19 pandemic on stock markets and economic activity: evidence from the US and Europe," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 51(2), pages 529-558, May.
    6. Andrieș, Alin Marius & Ongena, Steven & Sprincean, Nicu, 2021. "The COVID-19 Pandemic and Sovereign Bond Risk," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    7. Bȩdowska-Sójka, Barbara & Kliber, Agata, 2022. "Impact of COVID-19 on sovereign risk: Latin America versus Asia," Finance Research Letters, Elsevier, vol. 47(PA).
    8. Kanno, Masayasu, 2024. "Assessing the impact of the COVID-19 crisis on sovereign default risk," Research in International Business and Finance, Elsevier, vol. 68(C).
    9. Iustina Alina Boitan & Kamilla Marchewka-Bartkowiak, 2021. "The Sovereign-Bank Nexus in the Face of the COVID-19 Pandemic Outbreak—Evidence from EU Member States," Risks, MDPI, vol. 9(5), pages 1-21, May.

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