Sovereign Risk and the Pricing of Corporate Credit Default Swaps

Matthias Haerri (), Stefan Morkoetter and Simone Westerfeld ()

No 1423, Working Papers on Finance from University of St. Gallen, School of Finance

Abstract: Based on an empirical analysis of European corporations, we investigate the impact of sovereign risk on the pricing of corporate credit risk. In our paper, we show that sovereign credit default swaps (CDS) are positively correlated with corresponding corporate CDS spreads and are a significant factor for corporate CDS pricing models. We also find that this impact in-creases throughout the sovereign debt crisis in 2010-2011 and is more distinctive for Euro-zone countries that were more exposed to the sovereign debt crisis than others. We further observe that this effect is particularly pronounced for corporations with a high dependency on their domestic market.

Keywords: Credit Default Swaps; Pricing; Sovereign Risk (search for similar items in EconPapers)
JEL-codes: G12 G14 G24 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2014-05, Revised 2015-02
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Persistent link: https://EconPapers.repec.org/RePEc:usg:sfwpfi:2014:23

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