Sovereign Default Risk Premia: Evidence from the Default Swap Market

57 Pages Posted: 8 Dec 2009

Date Written: June 29, 2009

Abstract

This study explores the risk premia embedded in sovereign default swaps using a term structure model. The risk premia remunerate investors for unexpected changes in the default intensity. A number of interesting results emerge from the analysis. First, the risk premia contribution to the spreads decreases over the sample, 2003-2007, and rebounds at the start of the "credit crunch." Second, the daily risk premia co-move with US macro news and corporate default risk. Third, global factors explain most of Latin American countries' premia, and local factors of European and Asian ones. The importance of global factors grows over time.

Keywords: Credit Default Swaps, Term Structure of Credit Spreads, Emerging Markets

JEL Classification: F3, E44

Suggested Citation

Zinna, Gabriele, Sovereign Default Risk Premia: Evidence from the Default Swap Market (June 29, 2009). Available at SSRN: https://ssrn.com/abstract=1512858 or http://dx.doi.org/10.2139/ssrn.1512858

Gabriele Zinna (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

HOME PAGE: http://gabrielezinna.github.io/

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