How Sovereign is Sovereign Credit Risk? Global Prices, Local Quantities
59 Pages Posted: 9 Oct 2016 Last revised: 22 Nov 2018
Date Written: November 10, 2018
The sovereign default insurance market is concentrated and strongly intermediated, with fluctuations in insurance prices being dominated by common, global sources of risk. Yet, we find that insurance quantities are primarily explained by country-specific factors. Using net positions in sovereign default insurance contracts for 60 countries from October 2008 to September 2015, we find that the stock of a country's debt, and the size of its economy, explain 75% of cross-country differences in net insured interest. Debt issuance significantly explains variation in its dynamics. Our findings are informative for the regulatory debate on the market for sovereign default insurance.
Keywords: Credit Default Swaps, Credit Risk, Financial Intermediaries, OTC, Systemic Risk
JEL Classification: C3, F34, E44, G12, G15, H63
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