Systemic Sovereign Credit Risk: Lessons from the U.S. and Europe

46 Pages Posted: 30 Aug 2011  

Andrew Ang

BlackRock, Inc

Francis A. Longstaff

University of California, Los Angeles (UCLA) - Finance Area; National Bureau of Economic Research (NBER)

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Date Written: April 1, 2011

Abstract

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.

Suggested Citation

Ang, Andrew and Longstaff, Francis A., Systemic Sovereign Credit Risk: Lessons from the U.S. and Europe (April 1, 2011). Netspar Discussion Paper No. 04/2011-067. Available at SSRN: https://ssrn.com/abstract=1919485 or http://dx.doi.org/10.2139/ssrn.1919485

Andrew Ang (Contact Author)

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

Francis A. Longstaff

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-2218 (Phone)
310-206-5455 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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