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Discussion Paper Details

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Title: Sovereign Risk and Financial Risk

Author(s): Simon Gilchrist, Bin Wei, Vivian Yue and Egon Zakrajsek

Publication Date: December 2021

Keyword(s): CDS, Excess Bond Premium, Global financial cycle, Global financial risk and Sovereign bonds

Programme Area(s): Financial Economics, International Macroeconomics and Finance and Monetary Economics and Fluctuations

Abstract: 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 over 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 effect are strongest when measuring global risk using the excess bond premium -- a measure of the risk-bearing capacity of U.S. financial intermediaries. The spillover effects of global financial risk are more pronounced for speculative-grade sovereign bonds.

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Bibliographic Reference

Gilchrist, S, Wei, B, Yue, V and Zakrajsek, E. 2021. 'Sovereign Risk and Financial Risk'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=16750