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Pricing of Sovereign Credit Risk: Evidence from Advanced Economies During the Financial Crisis
Lorenzo Forni
International Monetary Fund (IMF)
C. Emre Alper
Boğaziçi University - The Faculty of Economics and Administrative Sciences
Marc Gerard
affiliation not provided to SSRN
Janurary 2012
IMF Working Paper No. 12/24
Abstract:
We investigate the pricing of sovereign credit risk over the period 2008-2010 for selected advanced economies by examining two widely-used indicators: sovereign credit default swap (CDS) and relative asset swap (RAS) spreads. Cointegration analysis suggests the existence of an imperfect market arbitrage relationship between the cash (RAS) and the derivatives (CDS) markets, with price discovery taking place in the latter. Likewise, panel regressions aimed at uncovering the fundamental drivers of the two indicators show that the CDS market, although less liquid, has provided a better signal for sovereign credit risk during the period of the recent financial crisis.
Number of Pages in PDF File: 27
Keywords: Credit risk, Cross country analysis, Developed countries, Financial crisis, Global Financial Crisis 2008-2009, Risk premium, Sovereign debt
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Date posted: February 2, 2012
Suggested CitationForni, Lorenzo, Alper, C. Emre and Gerard, Marc, Pricing of Sovereign Credit Risk: Evidence from Advanced Economies During the Financial Crisis (Janurary 2012). IMF Working Paper No. 12/24. Available at SSRN: http://ssrn.com/abstract=1997737
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