Credit Risk Premia in Sovereign Credit Default Swaps

53 Pages Posted: 15 May 2018 Last revised: 25 Nov 2018

See all articles by Rob C. Sperna Weiland

Rob C. Sperna Weiland

University of Amsterdam Business School; Tinbergen Institute

Date Written: November 21, 2018

Abstract

In this paper, I analyze credit risk premia embedded in sovereign CDS spreads. In particular, I consider a heretofore largely ignored component that reflects the compensation investors demand for default event risk. I find that this default event risk premium is most heavily priced in short maturity CDS spreads of low-rated countries. Risk premia related to unpredictable variations in default risk, on the other hand, are more important for long maturity CDS spreads of high-rated countries. I show that differences in CDS decomposition across rating classes are mainly caused by differences in sovereign-specific risk rather than differences in exposure to systemic risk.

Keywords: Sovereign Default Risk, Sovereign CDS, Default Event Risk Premium, Distress Risk Premium

JEL Classification: C58, G12, G13

Suggested Citation

Sperna Weiland, Rob C., Credit Risk Premia in Sovereign Credit Default Swaps (November 21, 2018). Available at SSRN: https://ssrn.com/abstract=3167834 or http://dx.doi.org/10.2139/ssrn.3167834

Rob C. Sperna Weiland (Contact Author)

University of Amsterdam Business School ( email )

Roetersstraat 18
Amsterdam, 1018WB
Netherlands

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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