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The re-pricing of sovereign risks following the Global Financial Crisis

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  • Malliaropulos, Dimitris
  • Migiakis, Petros

Abstract

How strong has been the effect of the Global Financial Crisis (GFC) on systemic risk in sovereign bond markets? Was the increase in credit spreads relative to triple-A benchmarks which followed the GFC the result of higher sovereign default risk or the result of a re-pricing that reflected changes in broader market conditions and risk aversion? In this paper we examine the variations of the systemic components of sovereign spreads before and after the GFC by specifying a sovereign credit yield curve which relates sovereign yield spreads to credit ratings and global factors which affected sovereign spreads regardless of their rating. We use daily data of ten-year bond yields and ratings for 64 developed economies and emerging markets, covering the period from 1∕1∕2000 to 1∕1∕2015 . Our estimates suggest that sovereign risk premia increased significantly after the GFC with most of the increase due to a re-pricing of broader market risks rather than an increase in the quantity or price of sovereign risk per se. Global risk in the sovereign bond market is driven by variables that relate to investor confidence, volatility risk, central bank liquidity and the position and the slope of the yield curve in the US.

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  • Malliaropulos, Dimitris & Migiakis, Petros, 2018. "The re-pricing of sovereign risks following the Global Financial Crisis," Journal of Empirical Finance, Elsevier, vol. 49(C), pages 39-56.
  • Handle: RePEc:eee:empfin:v:49:y:2018:i:c:p:39-56
    DOI: 10.1016/j.jempfin.2018.09.003
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    4. Malliaropulos, Dimitris & Migiakis, Petros, 2023. "A global monetary policy factor in sovereign bond yields," Journal of Empirical Finance, Elsevier, vol. 70(C), pages 445-465.
    5. Helen Louri & Petros Migiakis, 2019. "Financing economic growth in Greece: lessons from the crisis," Working Papers 262, Bank of Greece.
    6. Dimitris Malliaropulos & Petros Migiakis, 2018. "Quantitative easing and sovereign bond yields: a global perspective," Working Papers 253, Bank of Greece.
    7. Cuadros-Solas, Pedro Jesús & Salvador Muñoz, Carlos, 2022. "Disentangling the sources of sovereign rating adjustments: An examination of changes in rating policies following the GFC," Research in International Business and Finance, Elsevier, vol. 59(C).
    8. Dimitris A. Georgoutsos & Petros M. Migiakis, 2018. "Risk perceptions and fundamental effects on sovereign spreads," Working Papers 250, Bank of Greece.
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    10. Zhang, Han & Fan, Xiaoyun & Guo, Bin & Zhang, Wei, 2019. "Reexamining time-varying bond risk premia in the post-financial crisis era," Journal of Economic Dynamics and Control, Elsevier, vol. 109(C).

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    More about this item

    Keywords

    Sovereign risk; Credit yield curve; Global financial crisis; Sovereign ratings;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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