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Sovereign default risk premia: Evidence from the default swap market

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  • Zinna, Gabriele

Abstract

This study explores the risk premia embedded in sovereign default swaps using a term structure model. The risk premia remunerate investors for unexpected changes in the default intensity. A number of interesting results emerge from the analysis. First, the risk premia contribution to spreads decreases over the sample, 2003–07, and rebounds at the start of the ‘credit crunch.’ Second, daily risk premia co-move with US macro variables and corporate default risk. Third, global factors explain most of Latin American countries' premia, and local factors best explain European and Asian premia. The importance of global factors grows over time. Finally, conditioning on lagged local and global variables at a weekly frequency, sovereign risk premia are highly predictable.

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  • Zinna, Gabriele, 2013. "Sovereign default risk premia: Evidence from the default swap market," Journal of Empirical Finance, Elsevier, vol. 21(C), pages 15-35.
    • Handle: RePEc:eee:empfin:v:21:y:2013:i:c:p:15-35
    DOI: 10.1016/j.jempfin.2012.12.006
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    Cited by:

    1. Junye Li & Gabriele Zinna, 2014. "How much of bank credit risk is sovereign risk? Evidence from the eurozone," Temi di discussione (Economic working papers) 990, Bank of Italy, Economic Research and International Relations Area.
    2. Vincent Xiang & Michael T. Chng & Victor Fang, 2017. "The economic significance of CDS price discovery," Review of Quantitative Finance and Accounting, Springer, vol. 48(1), pages 1-30, January.
    3. Zinna, Gabriele, 2014. "Identifying risks in emerging market sovereign and corporate bond spreads," Emerging Markets Review, Elsevier, vol. 20(C), pages 1-22.
    4. Hassan, Kamrul & Hoque, Ariful & Gasbarro, Dominic, 2017. "Sovereign default risk linkage: Implication for portfolio diversification," Pacific-Basin Finance Journal, Elsevier, vol. 41(C), pages 1-16.
    5. Lafuente, Juan Angel & Serrano, Pedro, 2015. "On the compensation for illiquidity in sovereign credit markets," Journal of Multinational Financial Management, Elsevier, vol. 30(C), pages 83-100.
    6. Lafuente, Juan Ángel & Petit, Nuria & Serrano, Pedro, 2019. "Pricing factors in multiple-term structures from interbank rates," Journal of International Money and Finance, Elsevier, vol. 91(C), pages 138-159.
    7. Ballestra, Luca Vincenzo & Pacelli, Graziella & Radi, Davide, 2020. "Modeling CDS spreads: A comparison of some hybrid approaches," Journal of Empirical Finance, Elsevier, vol. 57(C), pages 107-124.
    8. Fong, Tom Pak Wing & Li, Ka-Fai & Fu, John, 2018. "Accounting for sovereign tail risk in emerging economies: The role of global and domestic risk factors," Emerging Markets Review, Elsevier, vol. 34(C), pages 98-110.
    9. El Abed, Riadh & Zardoub, Amna, 2017. "Time varying and asymmetric effect between sovereign credit market and financial market: The asymmetric DCC model," Economics Discussion Papers 2017-97, Kiel Institute for the World Economy (IfW Kiel).

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    More about this item

    Keywords

    Emerging markets; Default risk; Credit default swaps; Term structure models; Kalman filter;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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