Sovereign Risk and Natural Disasters in Emerging Markets

Jeroen Klomp

Emerging Markets Finance and Trade, 2015, vol. 51, issue 6, 1326-1341

Abstract: In this article, we explore the effect of large-scale natural disasters on sovereign default risk. We use a heterogeneous dynamic panel model including a set of more than 380 large-scale natural disasters for about forty emerging market countries in the period 1999–2010. After testing for the sensitivity of the results, our main findings suggest that natural disasters significantly increase the sovereign default premium paid by bond holders. That is, investors perceive natural disasters as an adverse shock that makes the government debt less sustainable and eventually triggers a sovereign default. In particular, it turns out that geophysical and meteorological disasters increase the credit default premium in both the long run as well as in the short run, while hydrological disasters have only a temporary effect.

Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:mes:emfitr:v:51:y:2015:i:6:p:1326-1341

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DOI: 10.1080/1540496X.2015.1011530

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