Does Monetary Policy Impact Sovereign Credit Risk Comovement?

51 Pages Posted: 14 May 2020 Last revised: 21 Dec 2021

See all articles by Massimiliano Caporin

Massimiliano Caporin

University of Padua - Department of Statistical Sciences

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration

Alberto Plazzi

Universita' della Svizzera italiana; Swiss Finance Institute

Multiple version iconThere are 2 versions of this paper

Date Written: December 21, 2020

Abstract

This paper shows that FED policy announcements are accompanied with a significant increase in international co-movement in the sovereign CDS market. The effect is strongest for emerg- ing markets, when the FED relaxes unconventional monetary policies, and for countries that are open to the trading of goods and flows, even with floating exchange rates. The announce- ments also affect closed economies whose currencies are pegged to the dollar. The evidence is consistent with recent theories of a global financial cycle and the pricing of a FED put. In contrast, ECB announcements hardly affect co-movement, even in the Eurozone.

Keywords: Sovereign credit risk, Monetary policy, Quantitative easing, Mundellian trilemma, Comovement

JEL Classification: E58, G12, G15

Suggested Citation

Caporin, Massimiliano and Pelizzon, Loriana and Plazzi, Alberto, Does Monetary Policy Impact Sovereign Credit Risk Comovement? (December 21, 2020). SAFE Working Paper No. 276, Available at SSRN: https://ssrn.com/abstract=3598166 or http://dx.doi.org/10.2139/ssrn.3598166

Massimiliano Caporin

University of Padua - Department of Statistical Sciences ( email )

Via Battisti, 241
Padova, 35121
Italy

Loriana Pelizzon (Contact Author)

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, D-60323
Germany

Alberto Plazzi

Universita' della Svizzera italiana ( email )

Via Buffi 13
CH-6900 Lugano
Switzerland

HOME PAGE: http://usi.to/mpy

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
107
Abstract Views
1,081
Rank
164,111
PlumX Metrics