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The Dynamics of Sovereign Credit Risk

37 Pages Posted: 13 Dec 2007 Last revised: 23 Sep 2013

Alexandre Jeanneret

HEC Montréal

Date Written: September 22, 2013

Abstract

This paper proposes a structural model for sovereign credit risk with endogenous sovereign debt and default policies. A maximum-likelihood estimation of the model with local stock market prices generates daily model-implied sovereign spreads. This approach explains two-thirds of the daily variation in observed sovereign spreads for emerging and European economies over the 2000-2011 period. Global factors help to further explain the time variation in sovereign credit risk. In particular, sovereign spreads in emerging markets vary with U.S. market uncertainty, while European spreads depend on Euro zone bond factors.

Keywords: Sovereign Debt, Credit Risk, Asset Pricing, International Financial Markets

JEL Classification: F34, G12, G13, G15

Suggested Citation

Jeanneret, Alexandre, The Dynamics of Sovereign Credit Risk (September 22, 2013). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1071665 or http://dx.doi.org/10.2139/ssrn.1071665

Alexandre Jeanneret (Contact Author)

HEC Montréal ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

HOME PAGE: http://www.alexandrejeanneret.com

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