The Impacts of Financial Crisis on Sovereign Credit Risk Analysis in Asia and Europe

Posted: 1 Jul 2013

See all articles by Min Zhang

Min Zhang

Independent

Adam Kolkiewicz

Independent

Tony S. Wirjanto

University of Waterloo - School of Accounting and Finance; University of Waterloo, Department of Statistics & Actuarial Science

Xindan Li

Nanjing University

Date Written: May 1, 2013

Abstract

We investigate the nature of sovereign credit risk for selected Asian and European countries based on a set of sovereign CDS data over an eight-year period that includes the episode of the 2008-2009 global financial crisis. The principal component analysis results indicate that there exists strong commonality in sovereign credit risk among the countries studied in this paper following the crisis. In addition, the regression results show that commonality is importantly associated with both local and global financial and economic variables. There are also important differences in the sovereign of credit risk behavior between Asian and European countries. Specifically, we find that foreign reserve, global stock market, and volatility risk premium, affect Asian and European sovereign credit risks in the opposite direction. Lastly, we model the arrival rates of credit events as a square-root diffusion process from which a pricing model is constructed and estimated over pre- and post-crisis periods. The resulting model is used to decompose credit spreads into risk premium and credit-event components. For most countries in our study, credit-event components weight more than risk-premiums, suggesting that, in the long term, investors are perhaps more concerned with the prospect of sovereign-specific credit events than systemic sovereign credit risks.

Keywords: Sovereign credit risk, financial crisis, Credit Default Swaps data, Asia, Europe, commonality, local and global, factors, principal component analysis, pricing model, maximum likelihood

JEL Classification: F34, G15, O16, O19, P34

Suggested Citation

Zhang, Min and Kolkiewicz, Adam and Wirjanto, Tony S. and Li, Xindan, The Impacts of Financial Crisis on Sovereign Credit Risk Analysis in Asia and Europe (May 1, 2013). Available at SSRN: https://ssrn.com/abstract=2274133

Min Zhang

Independent ( email )

Adam Kolkiewicz

Independent ( email )

Tony S. Wirjanto (Contact Author)

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x35210 (Phone)

HOME PAGE: http://https://uwaterloo.ca/statistics-and-actuarial-science/people-profiles/tony-wirjanto

University of Waterloo, Department of Statistics & Actuarial Science ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x35210 (Phone)
519-746-1875 (Fax)

HOME PAGE: http://math.uwaterloo.ca/statistics-and-actuarial-science/people-profiles/tony-wirjanto

Xindan Li

Nanjing University ( email )

Nanjing, Jiangsu 210093
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
490
PlumX Metrics