When is There a Strong Transfer Risk from the Sovereigns to the Corporates? -- Property Rights Gaps and CDS Spreads

CEPR Discussion Paper No. DP9252

Columbia Business School Research Paper No. 14-12

36 Pages Posted: 3 Mar 2014 Last revised: 19 Jul 2018

See all articles by Jennie Bai

Jennie Bai

Georgetown University - Department of Finance

Shang-Jin Wei

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); International Monetary Fund (IMF); Tsinghua University - School of Economics & Management

Multiple version iconThere are 3 versions of this paper

Date Written: March 2, 2014

Abstract

When a sovereign faces the risk of debt default, it attempts to expropriate the private sector. But the likelihood of a transfer from the sovereign risk to corporate default risk can be mitigated by legal institutions that provide strong property rights protection. Using a novel credit default swaps (CDS) dataset covering both government and corporate entities across 30 countries, this paper studies the strength of the transfer risk and the role of institutions in mitigating such risk. We find that sovereign risk on average has a statistically and economically significant influence on corporate credit risk. All else equal, a 100 basis points increase in the sovereign CDS spread leads to an increase in corporate CDS spreads by 74 basis points. The sovereign–corporate relation varies across corporations, with state-owned companies exhibiting a stronger relation. However, strong property rights institutions tend to weaken the connection. In contrast, contracting institutions (protection of creditor rights or minority shareholder rights) do not appear to matter in this context.

Keywords: sovereign risk; CDS; property rights institutions; contracting institutions; transfer risk

JEL Classification: G15, G38

Suggested Citation

Bai, Jennie and Wei, Shang-Jin, When is There a Strong Transfer Risk from the Sovereigns to the Corporates? -- Property Rights Gaps and CDS Spreads (March 2, 2014). CEPR Discussion Paper No. DP9252 ; Columbia Business School Research Paper No. 14-12. Available at SSRN: https://ssrn.com/abstract=2403537 or http://dx.doi.org/10.2139/ssrn.2403537

Jennie Bai (Contact Author)

Georgetown University - Department of Finance ( email )

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United States

HOME PAGE: http://www.jenniebai.com

Shang-Jin Wei

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
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Centre for Economic Policy Research (CEPR)

London
United Kingdom

International Monetary Fund (IMF)

700 19th Street, N.W.
Washington, DC 20431
United States

Tsinghua University - School of Economics & Management

Beijing, 100084
China

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