The impact and the contagion effect of natural disasters on sovereign credit risk. An empirical investigation

Caterina Di Tommaso, Matteo Foglia and Vincenzo Pacelli

International Review of Financial Analysis, 2023, vol. 87, issue C

Abstract: This paper investigates the relationship between natural disasters and the reaction of sovereign CDS spread in Europe. By applying an event study methodology during the period January 2007–December 2021 on an original database in which we identify 92 natural disasters in 17 European countries, we assess the reaction of the sovereign CDS market to a natural disaster. We find a heterogeneous response of the European sovereign risk to a natural disaster, as the response of the sovereign CDS market differs from region to region. The advent of a natural disaster can increase inequality between the regions due to the higher cost of credit for sovereigns and the reduced scope for manoeuvring public finances. Also, the results of the contagion effect confirm the hypothesis of a cross-border propagation effect, as natural disaster, in general, is not local event but spreads to other countries.

Keywords: Climate change; Physical risks; Sovereign CDS spreads; Natural disasters (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:87:y:2023:i:c:s1057521923000947

DOI: 10.1016/j.irfa.2023.102578

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