Systemic Sovereign Credit Risk: Lessons from the U.S. and Europe
Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)
Francis A. Longstaff
University of California, Los Angeles (UCLA) - Finance Area; National Bureau of Economic Research (NBER)
April 19, 2011
We study the nature of systemic sovereign credit risk using CDS spreads for the U.S. Treasury, individual U.S. states, and major European countries. Using a multifactor affine framework that allows for both systemic and sovereign-specific credit shocks, we find that there is considerable heterogeneity across U.S. and European issuers in their sensitivity to systemic risk. U.S. and Euro systemic shocks are highly correlated, but there is much less systemic risk among U.S. sovereigns than among European sovereigns. We also find that U.S. and European systemic sovereign risk is strongly related to financial market variables. These results provide strong support for the view that systemic sovereign risk has its roots in financial markets rather than in macroeconomic fundamentals.
Number of Pages in PDF File: 45
Keywords: Sovereign Default Risk, CDS, Systemic Risk, Contagion, Euro, Uni Bonds
JEL Classification: E44, F21, F34, F36, G12, G13, G15, G18
Date posted: April 21, 2011
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