Sovereign Risk and Financial Risk

46 Pages Posted: 4 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 Bank of Atlanta

Egon Zakrajsek

Bank for International Settlements (BIS)

Multiple version iconThere are 4 versions of this paper

Date Written: December 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 effect 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: CDS, Excess Bond Premium, Global financial cycle, Global financial risk, Sovereign bonds

JEL Classification: E43, E44, F34, G12

Suggested Citation

Gilchrist, Simon and Wei, Bin and Yue, Vivian and Zakrajsek, Egon, Sovereign Risk and Financial Risk (December 2021). CEPR Discussion Paper No. DP16750, Available at SSRN: https://ssrn.com/abstract=4026592

Simon Gilchrist (Contact Author)

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
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New York, NY 10003-711
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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

Vivian Yue

Emory University ( email )

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Atlanta, GA 30327
United States

HOME PAGE: http://vivianyue.com

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

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