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The pricing of sovereign risk and contagion during the European sovereign debt crisis

John Beirne () and Marcel Fratzscher ()

Journal of International Money and Finance, 2013, vol. 34, issue C, 60-82

Abstract: The paper analyses the drivers of sovereign risk for 31 advanced and emerging economies during the European sovereign debt crisis. It shows that a deterioration in countries' fundamentals and fundamentals contagion – a sharp rise in the sensitivity of financial markets to fundamentals – are the main explanations for the rise in sovereign yield spreads and CDS spreads during the crisis, not only for euro area countries but globally. By contrast, regional spillovers and contagion have been less important, including for euro area countries. The paper also finds evidence for herding contagion – sharp, simultaneous increases in sovereign yields across countries – but this contagion has been concentrated in time and among a few markets. Finally, empirical models with economic fundamentals generally do a poor job in explaining sovereign risk in the pre-crisis period for European economies, suggesting that the market pricing of sovereign risk may not have been fully reflecting fundamentals prior to the crisis.

Keywords: Sovereign risk; Contagion; Sovereign debt crisis; Bond spreads; CDS spreads; Ratings (search for similar items in EconPapers)
JEL-codes: E44 F30 G15 C23 H63 (search for similar items in EconPapers)
Date: 2013
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Working Paper: The pricing of sovereign risk and contagion during the European sovereign debt crisis (2013) Downloads
Working Paper: The Pricing of Sovereign Risk and Contagion during the European Sovereign Debt Crisis (2012) Downloads
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