Systemic Sovereign Credit Risk: Lessons from the U.S. and Europe
49 Pages Posted: 12 Mar 2012
Date Written: March 10, 2012
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.
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