Sovereign Risk and Financial Risk

43 Pages Posted: 1 Feb 2022

See all articles by Simon Gilchrist

Simon Gilchrist

New York University (NYU)

Bin Wei

Federal Reserve Bank of Atlanta

Vivian Z. Yue

Emory University; Federal Reserve Banks - Federal Reserve Bank of Atlanta

Egon Zakrajsek

Bank for International Settlements (BIS)

Multiple version iconThere are 4 versions of this paper

Date Written: November 24, 2021

Abstract

In this paper, we study the interplay between sovereign risk and global financial risk. We show that a substantial portion of the comovement among sovereign spreads is accounted for by changes in global financial risk. We construct bond-level sovereign spreads for dollar-denominated bonds issued by over 50 countries from 1995 to 2020 and use various indicators to measure global financial risk. Through panel regressions and local projection analysis, we find that an increase in global financial risk causes a large and persistent widening of sovereign bond spreads. These effects are strongest when measuring global risk using the excess bond premium -- a measure of the risk-bearing capacity of U.S. financial intermediaries. The spillover effects of global financial risk are more pronounced for speculative-grade sovereign bonds.

Keywords: Sovereign bonds, CDS, Global financial risk, Excess bond premium, Global financial cycle

JEL Classification: E43, E44, F34, G12

Suggested Citation

Gilchrist, Simon and Wei, Bin and Yue, Zhanwei and Zakrajsek, Egon, Sovereign Risk and Financial Risk (November 24, 2021). Available at SSRN: https://ssrn.com/abstract=3970876 or http://dx.doi.org/10.2139/ssrn.3970876

Simon Gilchrist

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

Bin Wei

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

HOME PAGE: http://https://www.frbatlanta.org/research/economists/wei-bin.aspx

Zhanwei Yue (Contact Author)

Emory University ( email )

201 Dowman Drive
Atlanta, GA 30322
United States

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Egon Zakrajsek

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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

Paper statistics

Downloads
65
Abstract Views
319
rank
396,584
PlumX Metrics