IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Sovereign Risk and Financial Risk

Listed author(s):
  • Vivian Yue

    (Federal Reserve Board)

Registered author(s):

    This paper examines the evidence on the relationship between sovereign bond spreads, economic activity, and global financial risk. Using an extensive data set of prices of outstanding sovereign bonds trading in the secondary market, we construct a comprehensive country index for sovereign bond spread dataset. Using an empirical framework, we disentangle the intricate relation linking the country sovereign bond spreads, economic fundamentals, and global financial risk index. The global financial risk is proxied by the Gilchrist-Zakrajsek bond spread, VIX index, as well as the CDS spread for major financial institutions. Our results indicate that the global financial risk component accounts for a large fraction of variation in sovereign bond spreads. When the global financial risk is high, sovereign bonds are more risky. Moreover, countries who experience a worse economic condition at the same time face a bigger increase in their financing cost. Furthermore, through the linkage between sovereign bond spreads and the domestic economy, the global financial risk in turn affects the macroeconomic variables significantly. We construct a general equilibrium model of sovereign debt and default to rationalize the empirical findings. The model features include risk-averse global investor, optimal default, and endogenous output dynamics for multiple countries. The sovereign default and bond prices depend on the borrower's economic conditions as well as the lender's risk aversion and riskiness. The sovereign default and spreads in turn affect the business cycles in borrowing countries in the model.

    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.

    File URL:
    Download Restriction: no

    Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 318.

    in new window

    Date of creation: 2012
    Handle: RePEc:red:sed012:318
    Contact details of provider: Postal:
    Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

    Web page:

    More information through EDIRC

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:red:sed012:318. 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: (Christian Zimmermann)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.