Sovereign Default Risk and the US Equity Market

94 Pages Posted: 5 Dec 2010 Last revised: 7 Apr 2015

Alexandre Jeanneret

HEC Montréal

Date Written: December 19, 2014

Abstract

This paper develops an international asset-pricing model with defaultable firms and governments that demonstrates how sovereign credit risk in Europe affects US equity market prices. The risk of a sovereign debt crisis is a threat to economic growth that reduces the value of international equities and increases their volatility. The effect is strongest under adverse economic conditions, when firms are in financial distress. A structural estimation of the model shows that sovereign default risk helps explain the level and the dynamics of equity volatility in Europe and the US over the 1991-2013 period.

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

JEL Classification: F31, F34, G12, G13, G15

Suggested Citation

Jeanneret, Alexandre, Sovereign Default Risk and the US Equity Market (December 19, 2014). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1719685 or http://dx.doi.org/10.2139/ssrn.1719685

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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