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

86 Pages Posted: 9 Oct 2016 Last revised: 23 Mar 2023

See all articles by Patrick Augustin

Patrick Augustin

McGill University; McGill University, Desautels Faculty of Management

Valeri Sokolovski

University of Alberta

Marti G. Subrahmanyam

New York University (NYU) - Leonard N. Stern School of Business

Davide Tomio

Darden School of Business

Date Written: June 8, 2021

Abstract

Sovereign default insurance price fluctuations are dominated by common risks. In contrast, fluctuations in 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 debt and size explain 75% of cross-country differences in net insured interest. We develop an economic framework showing that high commonality in prices and low commonality in quantities can arise jointly only if insurance demand and supply shift in opposite directions in response to global shocks. We identify hedge funds as primary net suppliers of sovereign default protection.

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

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

Suggested Citation

Augustin, Patrick and Augustin, Patrick and Sokolovski, Valeri and Subrahmanyam, Marti G. and Tomio, Davide, How Sovereign is Sovereign Credit Risk? Global Prices, Local Quantities (June 8, 2021). Journal of Monetary Economics, Vol. 131, 2022, 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 ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

HOME PAGE: http://https://patrickaugustin.ca/

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

University of Alberta ( email )

Edmonton, Alberta T6G 2R3
Canada

Marti G. Subrahmanyam (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

Davide Tomio

Darden School of Business ( email )

100 Darden Boulevard
Charlottesville, VA 22903
United States

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