When Is There a Strong Transfer Risk from the Sovereigns to the Corporates? Property Rights Gaps and CDS Spreads
When a sovereign faces the risk of debt default, it may be tempted to expropriate the private sector. This may be one reason for why international investment in private companies has to take into account the sovereign risk. But the likelihood of a transfer from the sovereign risk to corporate default risks may be mitigated by legal institutions that provide strong property rights protection. Using a novel credit default swaps (CDS) dataset covering both government and corporate entities across 30 countries, this paper studies both the average strength of the transfer risks and the role of institutions in mitigating such risks. We find that (1) sovereign risk on average has a statistically and economically significant influence on corporate credit risks. All else equal, a 100 basis points increase in the sovereign CDS spread leads to an increase in corporate CDS spreads by 71 basis points. (2) The sovereign-corporate relation varies across corporations, with state-owned companies exhibiting a stronger relation. (3) However, strong property rights institutions tend to weaken the connection. In contrast, contracting institutions (protection of creditor rights or minority shareholder rights) do not appear to matter much in this context.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
|Date of creation:||Dec 2012|
|Date of revision:|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Alter, Adrian & Schüler, Yves S., 2012.
"Credit spread interdependencies of European states and banks during the financial crisis,"
Journal of Banking & Finance,
Elsevier, vol. 36(12), pages 3444-3468.
- Adrian Alter & Yves Stephan Schüler, 2011. "Credit Spead Interdependencies of European States and Banks during the Financial Crisis," Working Paper Series of the Department of Economics, University of Konstanz 2011-24, Department of Economics, University of Konstanz.
- Dion Bongaerts & Frank De Jong & Joost Driessen, 2011. "Derivative Pricing with Liquidity Risk: Theory and Evidence from the Credit Default Swap Market," Journal of Finance, American Finance Association, vol. 66(1), pages 203-240, 02.
- Daron Acemoglu & Simon Johnson, 2005.
Journal of Political Economy,
University of Chicago Press, vol. 113(5), pages 949-995, October.
- Bernoth, Kerstin & von Hagen, Jürgen & Schuknecht, Ludger, 2012.
"Sovereign risk premiums in the European government bond market,"
Journal of International Money and Finance,
Elsevier, vol. 31(5), pages 975-995.
- Bernoth, Kerstin & Hagen, Jürgen von & Schuknecht, Ludger, 2006. "Sovereign Risk Premiums in the European Government Bond Market," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 151, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
- René M. Stulz, 2009.
"Credit Default Swaps and the Credit Crisis,"
NBER Working Papers
15384, National Bureau of Economic Research, Inc.
- Roberto Blanco & Simon Brennan & Ian W. Marsh, 2005. "An Empirical Analysis of the Dynamic Relation between Investment-Grade Bonds and Credit Default Swaps," Journal of Finance, American Finance Association, vol. 60(5), pages 2255-2281, October.
- Baillie, Richard T. & Geoffrey Booth, G. & Tse, Yiuman & Zabotina, Tatyana, 2002. "Price discovery and common factor models," Journal of Financial Markets, Elsevier, vol. 5(3), pages 309-321, July.
- Jappelli, Tullio & Pagano, Marco, 1991.
"Information Sharing in Credit Markets,"
CEPR Discussion Papers
579, C.E.P.R. Discussion Papers.
- Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert Vishny, .
"Investor Protection and Corporate Governance,"
19455, Harvard University OpenScholar.
- Acharya, Viral V & Drechsler, Itamar & Schnabl, Philipp, 2011.
"A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk,"
CEPR Discussion Papers
8679, C.E.P.R. Discussion Papers.
- Viral V. Acharya & Itamar Drechsler & Philipp Schnabl, 2011. "A Pyrrhic Victory? - Bank Bailouts and Sovereign Credit Risk," NBER Working Papers 17136, National Bureau of Economic Research, Inc.
- Ejsing, Jacob & Lemke, Wolfgang, 2011. "The Janus-headed salvation: Sovereign and bank credit risk premia during 2008-2009," Economics Letters, Elsevier, vol. 110(1), pages 28-31, January.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2011.
"The Forgotten History of Domestic Debt,"
Royal Economic Society, vol. 121(552), pages 319-350, 05.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "The Forgotten History of Domestic Debt," NBER Working Papers 13946, National Bureau of Economic Research, Inc.
- Reinhart, Carmen, 2008. "The Next (but not new) Frontier for Sovereign Default," MPRA Paper 11865, University Library of Munich, Germany.
- Jens Hilscher & Yves Nosbusch, 2010.
"Determinants of Sovereign Risk: Macroeconomic Fundamentals and the Pricing of Sovereign Debt,"
Review of Finance,
European Finance Association, vol. 14(2), pages 235-262.
- Jens Hilscher & Yves Nosbusch, 2007. "Determinants of Sovereign Risk: Macroeconomic Fundamentals and the Pricing of Sovereign Debt," Money Macro and Finance (MMF) Research Group Conference 2006 114, Money Macro and Finance Research Group, revised 24 Apr 2007.
- Marcel Peter & MartÃn Grandes, 2005. "How Important Is Sovereign Risk in Determining Corporate Default Premia? The Case of South Africa," IMF Working Papers 05/217, International Monetary Fund.
- Viral Acharya & Itamar Drechsler & Philipp Schnabl, 2011. "A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk," Working Papers 2012-004, Becker Friedman Institute for Research In Economics.
- Robert F. Dittmar, 2008. "Do Sovereign Bonds Benefit Corporate Bonds in Emerging Markets?," Review of Financial Studies, Society for Financial Studies, vol. 21(5), pages 1983-2014, September.
- Pierre Collin-Dufresne, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December.
- Kathy Yuan, 2005. "The Liquidity Service Of Benchmark Securities," Journal of the European Economic Association, MIT Press, vol. 3(5), pages 1156-1180, 09.
- Durbin, Erik & Ng, David, 2005.
"The sovereign ceiling and emerging market corporate bond spreads,"
Journal of International Money and Finance,
Elsevier, vol. 24(4), pages 631-649, June.
- Durbin, Erik & Ng, David T.C., 2002. "The Sovereign Ceiling and Emerging Market Corporate Bond Spreads," Working Papers 127286, Cornell University, Department of Applied Economics and Management.
- Stulz, Rene, 2010. "Credit default Swaps and the Credit Crisis," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 6, pages 157-175.
- Casey B. Mulligan & Andrei Shleifer, 2005. "The Extent of the Market and the Supply of Regulation," The Quarterly Journal of Economics, Oxford University Press, vol. 120(4), pages 1445-1473.
- Attinasi, Maria-Grazia & Checherita-Westphal, Cristina & Nickel, Christiane, 2009. "What explains the surge in euro area sovereign spreads during the financial crisis of 2007-09?," Working Paper Series 1131, European Central Bank.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:9252. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.