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The impact of global shocks on sovereign risk: Role of domestic factors

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  • Inoguchi, Masahiro

Abstract

This paper explores how domestic factors affect the linkages between global market uncertainty and sovereign credit risk in emerging market economies (EMEs). First, we assess the dynamic conditional correlations (DCCs) between sovereign credit default swap spreads and the VIX as a measure of the linkage between sovereign risk and global financial uncertainty. Second, we estimate how domestic idiosyncratic factors influence the calculated DCCs for periods before, during, and after the global financial crisis (GFC). Our findings reveal that the sensitivity of sovereign risk to global financial uncertainty (the calculated DCC series) was higher during and after the GFC and in EMEs and responded to domestic economic conditions particularly in EMEs. Specifically, the magnitude of the DCCs was higher in EMEs with lower domestic stock market returns in the post-GFC period. In addition to the postcrisis period, domestic factors influenced the DCCs of EMEs before and during the GFC.

Suggested Citation

  • Inoguchi, Masahiro, 2025. "The impact of global shocks on sovereign risk: Role of domestic factors," Economic Systems, Elsevier, vol. 49(2).
    • Handle: RePEc:eee:ecosys:v:49:y:2025:i:2:s0939362524000992
    DOI: 10.1016/j.ecosys.2024.101277
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    More about this item

    Keywords

    Sovereign CDS spreads; Global financial uncertainty; Dynamic conditional correlation; Domestic factors; Emerging market economies;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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