How Sovereign is Sovereign Credit Risk? Global Prices, Local Quantities

81 Pages Posted: 9 Oct 2016 Last revised: 7 Apr 2020

See all articles by Patrick Augustin

Patrick Augustin

McGill University, Desautels Faculty of Management

Valeri Sokolovski

HEC Montreal - Department of Finance

Marti G. Subrahmanyam

New York University (NYU) - Department of Finance

Davide Tomio

Darden School of Business

Date Written: November 10, 2018

Abstract

The sovereign default insurance market is concentrated and strongly intermediated, and insurance price fluctuations are dominated by common sources of risk. In contrast, their quantities are primarily explained by country-specific factors. Using net positions in sovereign default insurance contracts for 60 countries between 2008 and 2015, we show that a country’s stock of debt and size explain 75% of cross-country differences in net insured interest. We provide an economic framework demonstrating that, to have both a high commonality in prices and a low commonality in quantities, insurance demand and supply must shift in opposite directions in response to global shocks.

Keywords: credit default swaps, credit risk, debt, demand and supply, OTC

JEL Classification: C3, F34, E44, G12, G15, H63

Suggested Citation

Augustin, Patrick and Sokolovski, Valeri and Subrahmanyam, Marti G. and Tomio, Davide, How Sovereign is Sovereign Credit Risk? Global Prices, Local Quantities (November 10, 2018). CFS Working Paper No. 540, Available at SSRN: https://ssrn.com/abstract=2848944 or http://dx.doi.org/10.2139/ssrn.2848944

Patrick Augustin

McGill University, Desautels Faculty of Management ( email )

1001 Sherbrooke Street West
Quebec
Montreal, Quebec H3A 1G5
Canada

HOME PAGE: http://www.patrickaugustin.se

Valeri Sokolovski

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

HOME PAGE: http://www.hec.ca/en/profs/valeri.sokolovski.html

Marti G. Subrahmanyam (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business,
44 West 4th Street, Suite 9-68
New York, NY 10012-1126
United States
212-998-0348 (Phone)
212-995-4233 (Fax)

Davide Tomio

Darden School of Business ( email )

100 Darden Boulevard
Charlottesville, VA 22903
United States

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