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Sovereign Risk and Financial Risk

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In this paper, we study the interplay between sovereign risk and global financial risk. We show that a substantial portion of the comovement among sovereign spreads is accounted for by changes in global financial risk. We construct bond-level sovereign spreads for dollar-denominated bonds issued by more than 50 countries from 1995 to 2020 and use various indicators to measure global financial risk. Through panel regressions and local projection analysis, we find that an increase in global financial risk causes a large and persistent widening of sovereign bond spreads. These effects are strongest when measuring global risk using the excess bond premium, which is a measure of the risk-bearing capacity of US financial intermediaries. The spillover effects of global financial risk are more pronounced for speculative-grade sovereign bonds.

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  • Simon Gilchrist & Bin Wei & Vivian Z. Yue & Egon Zakrajšek, 2021. "Sovereign Risk and Financial Risk," FRB Atlanta Working Paper 2021-27, Federal Reserve Bank of Atlanta.
    • Handle: RePEc:fip:fedawp:94779
    DOI: 10.29338/wp2021-27
    Note: The authors thank Yan Bai (discussant), Roberto Chang, Hélène Rey, Jesse Schreger (discussant), Eric Van Wincoop, Martin Uribe, and participants in the 2021 National Bureau of Economic Research's International Seminar on Macroeconomics conference and seminars at Rutgers University, the Federal Reserve Banks of Atlanta and San Francisco, and the National Bank of Belgium. They also thank Giulio Cornelli and Chelsea Hunter for excellent research assistance. The views expressed here are those of the authors and not necessarily those of the Banks for International Settlements or the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
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    Cited by:

    1. Yusuf Soner Baskaya & Bryan Hardy & Ṣebnem Kalemli-Özcan & Vivian Yue, 2016. "Sovereign Risk and Bank Lending: Evidence from 1999 Turkish Earthquake," NBER Working Papers 22335, National Bureau of Economic Research, Inc.
    2. Luis Fernando Melo-Velandia & José Vicente Romero & Mahicol Stiben Ramírez-González, 2023. "The Global Financial Cycle and Country Risk in Emerging Markets During Stress Episodes: A Copula-CoVaR Approach," Borradores de Economia 1231, Banco de la Republica de Colombia.
    3. Akıncı, Özge, 2013. "Global financial conditions, country spreads and macroeconomic fluctuations in emerging countries," Journal of International Economics, Elsevier, vol. 91(2), pages 358-371.
    4. Florent Kanga GBONGUE & Lambert N’Galadjo BAMBA, 2023. "Le modèle hybride de la structure par terme des primes souveraines de crédit et de liquidité dans la zone UEMOA," Region et Developpement, Region et Developpement, LEAD, Universite du Sud - Toulon Var, vol. 57, pages 101-145.
    5. Chernov, Mikhail & Creal, Drew & Hördahl, Peter, 2023. "Sovereign credit and exchange rate risks: Evidence from Asia-Pacific local currency bonds," Journal of International Economics, Elsevier, vol. 140(C).
    6. J. Scott Davis & Eric Van Wincoop, 2021. "A Theory of Gross and Net Capital Flows over the Global Financial Cycle," Globalization Institute Working Papers 410, Federal Reserve Bank of Dallas, revised 20 Dec 2022.
    7. 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.
    8. Epstein, Brendan & Finkelstein Shapiro, Alan & González Gómez, Andrés, 2019. "Global financial risk, aggregate fluctuations, and unemployment dynamics," Journal of International Economics, Elsevier, vol. 118(C), pages 351-418.
    9. Yildirim, Zekeriya, 2022. "Global financial risk, the risk-taking channel, and monetary policy in emerging markets," Economic Modelling, Elsevier, vol. 116(C).
    10. István Ábel & Ádám Kóbor, 2022. "Macroeconomic Components of the Risks to Fiscal Sustainability in Hungary," Risks, MDPI, vol. 10(11), pages 1-13, October.
    11. Yusuf Soner Başkaya & Bryan Hardy & Ṣebnem Kalemli-Özcan & Vivian Z. Yue, 2023. "Sovereign Risk and Bank Lending: Theory and Evidence from a Natural Disaster," FRB Atlanta Working Paper 2023-01, Federal Reserve Bank of Atlanta.

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    More about this item

    Keywords

    sovereign bonds; CDS; global financial risk; excess bond premium; global financial cycle;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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