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Sovereign tail risk

López-Espinosa, Germán, Antonio Moreno (), Antonio Rubia and Laura Valderrama

Journal of International Money and Finance, 2017, vol. 79, issue C, 174-188

Abstract: We provide a new measure of sovereign country risk exposure (SCRE) to global sovereign tail risk based on information incorporated in 5-year sovereign CDS spreads. Our panel regressions with quarterly data from 53 countries show that macro risks have strong explanatory power for SCRE. Results show that SCRE increases for countries with less fiscal space, higher interest rates, and financial stability concerns. Exposure sensitivity to public sector leverage is shown to increase non-linearly with public debt and to decrease with central banks’ sovereign debt programs. Our results imply that good forward-looking macro-finance fundamentals, such as high expected GDP growth and low credit-to-GDP ratios protect countries against sovereign risk especially in times of global distress.

Keywords: Sovereign debt crisis; Exposure; Panel data analysis (search for similar items in EconPapers)
JEL-codes: E43 F34 F36 G01 H63 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:jimfin:v:79:y:2017:i:c:p:174-188