46 Pages Posted: 30 Aug 2011
Date Written: April 1, 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.
Suggested Citation: 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