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How Sovereign Is Sovereign Credit Risk?

Francis Longstaff, Jun Pan, Lasse Pedersen and Kenneth Singleton

American Economic Journal: Macroeconomics, 2011, vol. 3, issue 2, 75-103

Abstract: We study the nature of sovereign credit risk using an extensive set of sovereign CDS data. We find that the majority of sovereign credit risk can be linked to global factors. A single principal component accounts for 64 percent of the variation in sovereign credit spreads. Furthermore, sovereign credit spreads are more related to the US stock and high-yield markets than they are to local economic measures. We decompose credit spreads into their risk premium and default risk components. On average, the risk premium represents about a third of the credit spread. (JEL F34, G15, O16, O19, P34)

JEL-codes: F34 G15 O16 O19 P34 (search for similar items in EconPapers)
Date: 2011
Note: DOI: 10.1257/mac.3.2.75
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Working Paper: How Sovereign is Sovereign Credit Risk? (2007) Downloads
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