Sovereign Risk, Elections and Contagion

29 Pages Posted: 23 Jan 2013

See all articles by Chi Li

Chi Li

CITIC Securities

Christopher Balding

Fulbright University Vietnam

Minsoo Lee

Asian Development Bank

Multiple version iconThere are 2 versions of this paper

Date Written: January 22, 2013

Abstract

This paper aims to quantify the political risk effect and its different economic implications in normal and crisis situations through the proxy analysis of election and the sovereign bond spreads. Our study leads to three main findings. First, in normal economic situations, elections and government turnovers expand bond spreads, demonstrating investors’ concern over the possibility of government policies or instability brought by the election. During a crisis, however, investors prefer change, indicating hope in new policies ameliorate public finances. Second, due to the prolonged euro zone sovereign debt crisis, elections in European countries have stronger contagion effects in their own region during a global slowdown period than a normal period; however, their effect does not carry over globally after the 2008 financial crisis. Third, results show that the election induced peak shrinks from 3 months before and after the election date to 1-2 months when the economic situation turns from normal to a downgraded period.

Suggested Citation

Li, Chi and Balding, Christopher and Lee, Minsoo, Sovereign Risk, Elections and Contagion (January 22, 2013). ESADE Business School Research Paper No. 12. Available at SSRN: https://ssrn.com/abstract=2205502

Chi Li

CITIC Securities ( email )

Beijing
China

Christopher Balding (Contact Author)

Fulbright University Vietnam ( email )

Vietnam

Minsoo Lee

Asian Development Bank ( email )

6 ADB Avenue
Mandaluyong City
Metro Manila, 1550
Philippines
63-2-683-1622 (Phone)
63-2-636-2342 (Fax)

HOME PAGE: http://www.adb.org

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