Sovereign Risk, Elections, and Contagion

27 Pages Posted: 21 Jun 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: May 1, 2013


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 eurozone 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.

Keywords: election, sovereign bond, contagion, financial crisis, Europe, Asia

JEL Classification: F34, F36, O52

Suggested Citation

Li, Chi and Balding, Christopher and Lee, Minsoo, Sovereign Risk, Elections, and Contagion (May 1, 2013). Asian Development Bank Economics Working Paper Series No. 348. Available at SSRN: or

Chi Li (Contact Author)

CITIC Securities ( email )


Christopher Balding

Fulbright University Vietnam ( email )


Minsoo Lee

Asian Development Bank ( email )

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


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