Hot Off the Press: News-implied Sovereign Default Risk

70 Pages Posted: 18 Nov 2021 Last revised: 13 Jul 2023

See all articles by Chukwuma Dim

Chukwuma Dim

George Washington University

Kevin Koerner

European Investment Bank

Marcin Wolski

European Investment Bank

Sanne Zwart

European Investment Bank

Date Written: October 18, 2021

Abstract

We develop a novel sovereign default risk index using natural language processing techniques and 10 million news articles covering over 100 countries. The index is a reliable high-frequency measure of countries' default risks, particularly those lacking market-based measures. It predicts sovereign CDS spread, credit rating downgrades, and realized defaults over long horizons. Consistent with theories on sovereign risk spillovers, increase in the index predicts (i) higher firm default probability, (ii) higher firm default protection cost, and (iii) lower equity valuation, which is much stronger for global vs. country-specific default concerns. The index yields valuable signals for equity market timing strategies.

Keywords: Sovereign default, Credit risk, Equity returns, Machine learning, Natural language processing, Early warning indicators

JEL Classification: F10, F30, G12, G15

Suggested Citation

Dim, Chukwuma and Koerner, Kevin and Wolski, Marcin and Zwart, Sanne, Hot Off the Press: News-implied Sovereign Default Risk (October 18, 2021). Available at SSRN: https://ssrn.com/abstract=3955052 or http://dx.doi.org/10.2139/ssrn.3955052

Chukwuma Dim (Contact Author)

George Washington University ( email )

2121 I Street NW
Washington, DC 20052
United States

Kevin Koerner

European Investment Bank ( email )

98-100 Boulevard Konrad Adenauer
L-2950
Luxembourg

Marcin Wolski

European Investment Bank ( email )

Luxembourg City, 2968
Luxembourg
691286623 (Phone)

Sanne Zwart

European Investment Bank ( email )

98-100 Boulevard Konrad Adenauer
L-2950
Luxembourg

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