Sovereign Default Risk and the U.S. Equity Market

Alexandre Jeanneret

Journal of Financial and Quantitative Analysis, 2017, vol. 52, issue 1, 305-339

Abstract: This paper develops a two-country asset pricing model with defaultable firms and governments. This model shows that higher sovereign credit risk in a country depresses equity prices internationally and increases their volatility. The effect is strongest during adverse economic conditions and when firms are close to financial distress. A structural estimation provides evidence that sovereign default risk in Europe affects European and U.S. stock markets through the threat of an economic slowdown.

Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:cup:jfinqa:v:52:y:2017:i:01:p:305-339_00

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