News sentiment and sovereign credit risk

Lara Cathcart, Nina M. Gotthelf, Matthias Uhl and Yining Shi

European Financial Management, 2020, vol. 26, issue 2, 261-287

Abstract: We explore the impact of media content on sovereign credit risk. Our measure of media tone is extracted from the Thomson Reuters News Analytics database. As a proxy for sovereign credit risk we consider credit default swap (CDS) spreads, which are decomposed into their risk premium and default risk components. We find that media tone explains and predicts CDS returns and is a mixture of noise and information. Its effect on risk premium induces a temporary change in investors’ appetite for credit risk exposure, whereas its impact on the default component leads to reassessments of the fundamentals of sovereign economies.

Date: 2020
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https://doi.org/10.1111/eufm.12219

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