How Sovereign is Sovereign Credit Risk? Global Prices, Local Quantities
81 Pages Posted: 9 Oct 2016 Last revised: 7 Apr 2020
Date Written: November 10, 2018
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: Suggested Citation