Hot off the press: News-implied sovereign default risk

Chukwuma Dim, Kevin Koerner, Marcin Wolski and Sanne Zwart

No 2022/06, EIB Working Papers from European Investment Bank (EIB)

Abstract: We develop a sovereign default risk index using natural language processing techniques and 10 million news articles covering over 100 countries. The index is a highfrequency measure of countries' default risk, particularly for those lacking marketbased measures: it 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 the index are negatively associated with same-week market returns, which reverses over the next week, indicating that investors might overreact to default concerns. Equity markets' reaction to default concerns is more pronounced and persistent for countries with tight fiscal constraints. The response 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; Naturallanguage processing; Early warning indicators (search for similar items in EconPapers)
JEL-codes: F30 G12 G15 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-big, nep-cmp, nep-fmk, nep-opm and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:eibwps:202206

DOI: 10.2867/661002

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