Hot Off the Press: News-implied Sovereign Default Risk

75 Pages Posted: 18 Nov 2021 Last revised: 12 Apr 2024

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 propose a novel high-frequency measure of sovereign default risk that can be used when traditional metrics like CDS spreads are unavailable. The measure exploits the information in news text, can be computed in real-time for any country, and is highly informative about sovereign default risk. It predicts sovereign CDS spreads, rating downgrades, and realized defaults over long horizons. Consistent with theories on sovereign risk spillovers, an increase in the index is associated with higher firm default probability, default protection cost, and lower equity valuation. The measure is valuable for equity market-timing, and its informativeness is driven by macroeconomic concerns.

Keywords: Sovereign default, Credit risk, Equity returns, News media text, 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

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
588
Abstract Views
2,831
Rank
85,661
PlumX Metrics