How sovereign is sovereign credit risk? Global prices, local quantities

Patrick Augustin, Valeri Sokolovski, Marti G. Subrahmanyam and Davide Tomio ()

Journal of Monetary Economics, 2022, vol. 131, issue C, 92-111

Abstract: Price fluctuations of sovereign default insurance are dominated by common risks. In contrast, fluctuations in their quantities are primarily explained by country-specific factors. Using net positions in sovereign default insurance contracts for 60 countries between 2008 and 2015, we show that a country’s debt and size explain 75% of cross-country differences in net insured interest. We develop an economic framework showing that high co-movement in prices and low co-movement in quantities can arise jointly only if insurance demand and supply shift in opposite directions in response to global shocks. Positions data support that this evidence is more salient for more intermediated assets.

Keywords: Credit default swaps; Credit risk; Debt; Demand and supply; Over-the-counter (search for similar items in EconPapers)
JEL-codes: C3 E44 F34 G12 G15 H63 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:131:y:2022:i:c:p:92-111

DOI: 10.1016/j.jmoneco.2022.07.005

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