Systemic Sovereign Credit Risk: Lessons from the U.S. and Europe
45 Pages Posted: 21 Apr 2011
Date Written: 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.
Keywords: Sovereign Default Risk, CDS, Systemic Risk, Contagion, Euro, Uni Bonds
JEL Classification: E44, F21, F34, F36, G12, G13, G15, G18
Suggested Citation: Suggested Citation