Sovereign Debt and Equity Returns in the Face of Disaster

54 Pages Posted: 10 Apr 2020 Last revised: 21 Nov 2022

See all articles by Thorsten Martin

Thorsten Martin

Bocconi University; IGIER - Innocenzo Gasparini Institute for Economic Research

Florian Nagler

Bocconi University; IGIER - Innocenzo Gasparini Institute for Economic Research

Date Written: November 18, 2022

Abstract

What makes an asset disaster resilient? We empirically study the role of sovereign debt for disaster resilience in a large global sample of firms. Using a novel firm-level measure of sovereign debt, we find that stocks with high (low) firm-level sovereign debt experience an increase (decrease) in their comovement with the global market portfolio in a disaster. This divergence in disaster betas demands a risk premium and high sovereign-debt firms earn higher returns in normal times. In a disaster, analysts turn more pessimistic and disagree more about the long-term earnings growth of high sovereign-debt firms. The results are robust to a host of firm characteristics, within the same headquarter country and industry, and to a broader measure of fiscal constraints. Our findings have important implications for disaster-based asset pricing models and suggest that fiscal constraints are a key driver of asset resilience.

Keywords: Sovereign debt, fiscal constraints, disaster, cross-sectional empirical asset pricing, long-term growth expectations

JEL Classification: F30, G12, G14, G15, H12, H50, H63

Suggested Citation

Martin, Thorsten and Nagler, Florian, Sovereign Debt and Equity Returns in the Face of Disaster (November 18, 2022). Available at SSRN: https://ssrn.com/abstract=3572839 or http://dx.doi.org/10.2139/ssrn.3572839

Thorsten Martin

Bocconi University ( email )

Via Roentgen 1
Milan, 20136
Italy

HOME PAGE: http://https://sites.google.com/view/thorstenmartin

IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Via Roentgen 1
Milan, 20136
Italy

Florian Nagler (Contact Author)

Bocconi University ( email )

Via Roentgen 1
Milan, MI 20136
Italy

HOME PAGE: http://sites.google.com/site/floriannagler/

IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Milan, MI 20136
Italy

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