Relative Bias in Sovereign Credit Risk Spill-over to Domestic Firms
42 Pages Posted: 2 Sep 2014 Last revised: 8 Sep 2015
Date Written: September 8, 2015
In this paper, we investigate the spill-over of sovereign rating changes into the corporate sector across 34 countries, with a primary focus on the relative effects of positive and negative events. Positive or negative bias of such spill-overs could impact the relative speed and depth of recessions versus recoveries. We find that such bias varies across countries. Our results also show considerable variation in total (positive and negative) spill-over; the spill-over rates can partly be explained by firm and sovereign level characteristics, with firms rated at parity with the sovereign particularly affected by both positive and negative spill-over in both investment and sub-investment grade rated sovereigns.
Keywords: Credit risk, sovereign ratings, firm ratings, rating spill-over effects
JEL Classification: G15, G24
Suggested Citation: Suggested Citation