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Real Economic Shocks and Sovereign Credit Risk


Patrick Augustin


McGill University; McGill University

Roméo Tédongap


Swedish House of Finance

December 15, 2011


Abstract:     
We provide new empirical evidence that U.S. expected growth and consumption volatility are closely related to the strong co-movement in sovereign spreads. We rationalize these findings in an equilibrium model with recursive utility for CDS spreads. The framework nests a reduced-form default process with country-specific sensitivity to expected growth and macroeconomic uncertainty. Exploiting the high-frequency information in the CDS term structure across 38 countries, we estimate the model and find parameters consistent with preference for early resolution of uncertainty. Our results confirm the existence of time-varying risk premia in sovereign spreads as a compensation for exposure to common U.S. macroeconomic risk.

Number of Pages in PDF File: 59

Keywords: CDS, Generalized Disappointment Aversion, Sovereign Risk, Term Structure

JEL Classification: C5, E44, F30, G12, G15

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Date posted: November 23, 2010 ; Last revised: April 17, 2014

Suggested Citation

Augustin, Patrick and Tédongap, Roméo, Real Economic Shocks and Sovereign Credit Risk (December 15, 2011). Available at SSRN: http://ssrn.com/abstract=1713454 or http://dx.doi.org/10.2139/ssrn.1713454

Contact Information

Patrick Augustin
McGill University ( email )
1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada
HOME PAGE: http://www.patrickaugustin.se
McGill University ( email )
1001 Sherbrooke Street West
Quebec
Montreal, Quebec H3A 1G5
Canada
HOME PAGE: http://www.patrickaugustin.se
Roméo Tédongap (Contact Author)
Swedish House of Finance ( email )
Drottninggatan 98
111 60 Stockholm
Sweden

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