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The Exodus from Sovereign Risk: Sovereign Ceiling Violations in Credit Default Swap Markets

69 Pages Posted: 22 Mar 2013 Last revised: 9 May 2013

Jongsub Lee

University of Florida - Warrington College of Business Administration

Andy Naranjo

University of Florida - Warrington College of Business Administration

Stace Sirmans

University of Arkansas - Department of Finance

Date Written: May 9, 2013

Abstract

This paper examines sovereign ceiling violations (SCVs) in credit default swap (CDS) markets, whereby private sector firms have lower CDS spreads relative to their sovereign counterparts with equal contractual terms. Using 5-year CDS spreads on 2,364 companies in 54 countries during 2004-2011, we find that firms exposed to better property rights institutions through their foreign asset positions (Institutional channel) and firms whose stocks are listed on exchanges with stricter disclosure requirements (Informational channel) tend to violate the sovereign ceiling rule. Our results suggest that firm-level global asset and information connections are important mechanisms to delink firms from their sovereign risk.

Keywords: Credit default swap, sovereign ceiling, transfer and convertibility risk, asset geographic location, cross-listing, property rights, creditor rights, disclosure requirement, credit rating

JEL Classification: F23, F34, F36, G01, G15, K40

Suggested Citation

Lee, Jongsub and Naranjo, Andy and Sirmans, Stace, The Exodus from Sovereign Risk: Sovereign Ceiling Violations in Credit Default Swap Markets (May 9, 2013). Available at SSRN: https://ssrn.com/abstract=2237913 or http://dx.doi.org/10.2139/ssrn.2237913

Jongsub Lee (Contact Author)

University of Florida - Warrington College of Business Administration ( email )

Department of Finance Insurance & Real Estate
P.O. Box 117168
Gainesville, FL 32611-7168
United States
352-273-4966 (Phone)
352-392-0301 (Fax)

Andy Naranjo

University of Florida - Warrington College of Business Administration ( email )

P.O. Box 117168
Gainesville, FL 32611-7168
United States
352-392-3781 (Phone)

Stace Sirmans

University of Arkansas - Department of Finance ( email )

WCOB 302
University of Arkansas
Fayetteville, AR 72701
United States

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