Sovereign Tail Risk

44 Pages Posted: 22 Jul 2014

See all articles by Germán López-Espinosa

Germán López-Espinosa

University of Navarra

Antonio Moreno

School of Economics and Business, University of Navarra

Antonio Rubia Serrano

University of Alicante, Department of Financial Economics; University of California, Los Angeles (UCLA) - Finance Area

Laura Valderrama

International Monetary Fund - Monetary and Capital Markets Department

Date Written: July 20, 2014

Abstract

We provide a new measure of sovereign country risk exposure to global sovereign tail risk (SCRE) based on information incorporated in 5-year sovereign CDS spreads. Our panel regressions with quarterly data from 53 countries show that macro risks have strong explanatory power for SCRE. After controlling for liquidity conditions and financial market variables, SCRE increases for countries with higher interest rates, public debt, public deficit, credit-to-GDP, lower economic growth and looser monetary policy. We show that our risk exposure variable reacts significantly more than mean (median) CDS spreads to macro-financial risks. Our results therefore imply that good fundamentals protect countries against sovereign risk especially in times of global distress.

Keywords: Sovereign Debt Crisis, Exposure, Panel Data

JEL Classification: E43, F34, F36, G01, H63

Suggested Citation

López-Espinosa, Germán and Moreno, Antonio and Serrano, Antonio Rubia and Valderrama, Laura, Sovereign Tail Risk (July 20, 2014). Available at SSRN: https://ssrn.com/abstract=2468936 or http://dx.doi.org/10.2139/ssrn.2468936

Germán López-Espinosa

University of Navarra ( email )

Facultad de Ciencias Económicas y Empresariales
Edificio Amigos
Pamplona, Navarra 31080
Spain
+34 948425600 (Phone)
+34 948425626 (Fax)

Antonio Moreno (Contact Author)

School of Economics and Business, University of Navarra ( email )

Ed. Amigos
Pamplona, Navarra 31009
Spain

Antonio Rubia Serrano

University of Alicante, Department of Financial Economics ( email )

Ctra. S. Vicente s/n
03690-S. Vicente del Raspeig
Alicante, San Vicente del Raspeig - Alicante 03690
Spain
(34) 965 903 621 (Phone)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
(310) 825-7246 (Phone)

Laura Valderrama

International Monetary Fund - Monetary and Capital Markets Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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