Pricing of Sovereign Credit Risk: Evidence from Advanced Economies During the Financial Crisis

27 Pages Posted: 2 Feb 2012  

C. Emre Alper

International Monetary Fund (IMF)

Lorenzo Forni

International Monetary Fund (IMF)

Marc Gerard

affiliation not provided to SSRN

Date Written: January 2012

Abstract

We investigate the pricing of sovereign credit risk over the period 2008-2010 for selected advanced economies by examining two widely-used indicators: sovereign credit default swap (CDS) and relative asset swap (RAS) spreads. Cointegration analysis suggests the existence of an imperfect market arbitrage relationship between the cash (RAS) and the derivatives (CDS) markets, with price discovery taking place in the latter. Likewise, panel regressions aimed at uncovering the fundamental drivers of the two indicators show that the CDS market, although less liquid, has provided a better signal for sovereign credit risk during the period of the recent financial crisis.

Keywords: Credit risk, Developed countries, Global Financial Crisis 2008-2009, Risk premium, Sovereign debt, bond, arbitrage, bonds, credit risk, stock prices, government_bonds, derivatives market, government bonds, stock market, emerging markets, derivatives markets, bond spreads, bond purchases, government bond, risk aversion, sovereign bond, bond_purchases, money market, bond yields, bond market, bond markets, stock market index, benchmark government bond, term bond, stock market volatility, financial stability, bond yield, financial institutions, long-term bond market, corporate bond, risk premium, financial markets, coupon bond, bond estimators, money market rate, government bond yields, governme

JEL Classification: E43, E62, G12

Suggested Citation

Alper, C. Emre and Forni, Lorenzo and Gerard, Marc, Pricing of Sovereign Credit Risk: Evidence from Advanced Economies During the Financial Crisis (January 2012). IMF Working Paper No. 12/24. Available at SSRN: https://ssrn.com/abstract=1997737

C. Emre Alper

International Monetary Fund (IMF) ( email )

1700 19th Street, NW
Washington, DC 20431
United States

Lorenzo Forni (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Marc Gerard

affiliation not provided to SSRN

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