Sovereign Risk and Financial Risk

Egon Zakrajšek (), Simon Gilchrist, Bin Wei and Vivian Yue

No 16750, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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: Sovereign bonds; Cds; Global financial risk; Excess bond premium; Global financial cycle (search for similar items in EconPapers)
JEL-codes: E43 E44 F34 G12 (search for similar items in EconPapers)
Date: 2021-11
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Related works:
Journal Article: Sovereign risk and financial risk (2022)
Chapter: Sovereign Risk and Financial Risk (2021)
Working Paper: Sovereign Risk and Financial Risk (2021)
Working Paper: Sovereign Risk and Financial Risk (2021)
Working Paper: Sovereign Risk and Financial Risk (2021)
Working Paper: Sovereign Risk and Financial Risk (2013)
Working Paper: Sovereign Risk and Financial Risk (2012)
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