News-Implied Sovereign Default Risk

49 Pages Posted: 18 Nov 2021

See all articles by Chukwuma Dim

Chukwuma Dim

Frankfurt School of Finance & Management

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 real-time measure of sovereign default risk using natural language processing and implement it using 10 million news articles covering over 100 countries. Our News-implied Sovereign Risk Index (NSRI) is a high-frequency measure of countries' default risk, particularly for those lacking market-based measures: NSRI correlates with sovereign CDS spreads, predicts rating downgrades, and reflects default risk information not fully captured by CDS spreads. We assess the influence of sovereign default concerns on equity markets and find that spikes in NSRI are negatively associated with same-week market returns, which reverses over the next week, indicating that investors might overreact to default risk news. Equity markets' reaction to default concerns is more pronounced and persistent for countries with tight fiscal constraints. The reaction to global, compared to country-specific, default concerns is much stronger, underlining the relevance of global "push" factors for local asset prices.

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

JEL Classification: G15, G12, F34, F37

Suggested Citation

Dim, Chukwuma and Koerner, Kevin and Wolski, Marcin and Zwart, Sanne, 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)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

HOME PAGE: http://sites.google.com/view/chukwumadim/

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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