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Sovereign Risk and the Pricing of Corporate Credit Default Swaps

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  • Haerri, Matthias
  • Morkoetter, Stefan
  • Westerfeld, Simone

Abstract

Based on an empirical analysis of European corporations, we investigate the impact of sovereign risk on the pricing of corporate credit risk. In our paper, we show that sovereign credit default swaps (CDS) are positively correlated with corresponding corporate CDS spreads and are a significant factor for corporate CDS pricing models. We also find that this impact in-creases throughout the sovereign debt crisis in 2010-2011 and is more distinctive for Euro-zone countries that were more exposed to the sovereign debt crisis than others. We further observe that this effect is particularly pronounced for corporations with a high dependency on their domestic market.

Suggested Citation

  • Haerri, Matthias & Morkoetter, Stefan & Westerfeld, Simone, 2014. "Sovereign Risk and the Pricing of Corporate Credit Default Swaps," Working Papers on Finance 1423, University of St. Gallen, School of Finance, revised Feb 2015.
    • Handle: RePEc:usg:sfwpfi:2014:23
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    References listed on IDEAS

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    More about this item

    Keywords

    Credit Default Swaps; Pricing; Sovereign Risk;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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