Sovereign Risk and the Pricing of Corporate Credit Default Swaps

33 Pages Posted: 25 Jan 2015 Last revised: 10 Jun 2016

See all articles by Matthias Haerri

Matthias Haerri

University of Applied Sciences Northwestern Switzerland (CH)

Stefan Morkoetter

University of St. Gallen - School of Finance

Simone Westerfeld

University of St. Gallen (HSG), School of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: May 23, 2014

Abstract

Based on an empirical analysis of European corporations, we investigate the impact of sovereign risk on the pricing of corporate credit risk. In our paper, we show that sovereign credit default swaps (CDS) are positively correlated with corresponding corporate CDS spreads and are a significant factor for corporate CDS pricing models. We also find that this impact in-creases throughout the sovereign debt crisis in 2010-2011 and is more distinctive for Euro-zone countries that were more exposed to the sovereign debt crisis than others. We further observe that this effect is particularly pronounced for corporations with a high dependency on their domestic market.

Keywords: Credit Default Swaps, Government Bonds

JEL Classification: G12, G14, G24

Suggested Citation

Haerri, Matthias and Morkoetter, Stefan and Westerfeld, Simone, Sovereign Risk and the Pricing of Corporate Credit Default Swaps (May 23, 2014). Journal of Credit Risk, 2015; University of St.Gallen, School of Finance Research Paper No. 2014/23. Available at SSRN: https://ssrn.com/abstract=2554483 or http://dx.doi.org/10.2139/ssrn.2554483

Matthias Haerri

University of Applied Sciences Northwestern Switzerland (CH) ( email )

Riggenbachstrasse 16
Olten, Solothurn 4600
Switzerland

Stefan Morkoetter (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Simone Westerfeld

University of St. Gallen (HSG), School of Finance ( email )

Dufourstrasse
St. Gallen, 9000
Switzerland

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