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

49 Pages Posted: 12 Mar 2012

See all articles by Andrew Ang

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: March 10, 2012

Abstract

We study the nature of systemic sovereign credit risk using CDS spreads for the U.S. Treasury, individual U.S. states, and major Eurozone countries. Using a multifactor affine framework that allows for both systemic and sovereign-specific credit shocks, we find that there is much less systemic risk among U.S. sovereigns than among Eurozone sovereigns. Thus, systemic sovereign risk is not directly caused by macroeconomic integration. We also find that both U.S and Eurozone systemic sovereign risk is strongly related to financial market returns. 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 (March 10, 2012). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=2019611 or http://dx.doi.org/10.2139/ssrn.2019611

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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