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Systemic Sovereign Credit Risk: Lessons from the U.S. and Europe

Andrew Ang () and Francis Longstaff

No 16982, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the nature of systemic sovereign credit risk using CDS spreads for the U.S. Treasury, individual U.S. states, and major European countries. Using a multifactor affine framework that allows for both systemic and sovereign-specific credit shocks, we find that there is considerable heterogeneity across U.S. and European issuers in their sensitivity to systemic risk. U.S. and Euro systemic shocks are highly correlated, but there is much less systemic risk among U.S. sovereigns than among European sovereigns. We also find that U.S. and European systemic sovereign risk is strongly related to financial market variables. These results provide strong support for the view that systemic sovereign risk has its roots in financial markets rather than in macroeconomic fundamentals.

JEL-codes: E44 F21 F34 F36 G12 G13 G15 G18 (search for similar items in EconPapers)
Date: 2011-04
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mic
Note: AP
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Published as Ang, Andrew & Longstaff, Francis A., 2013. "Systemic sovereign credit risk: Lessons from the U.S. and Europe," Journal of Monetary Economics, Elsevier, vol. 60(5), pages 493-510.

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