How Sovereign is Sovereign Credit Risk? / Francis A. Longstaff, Jun Pan, Lasse H. Pedersen, Kenneth J. Singleton.

Format:

Book

Author/Creator:

Longstaff, Francis A.

Contributor:

National Bureau of Economic Research.

Pan, Jun.

Pedersen, Lasse H.

Singleton, Kenneth J.

Series:

Working Paper Series (National Bureau of Economic Research) no. w13658.

NBER working paper series no. w13658

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2007.

Summary:

We study the nature of sovereign credit risk using an extensive sample of CDS spreads for 26 developed and emerging-market countries. Sovereign credit spreads are surprisingly highly correlated, with just three principal components accounting for more than 50 percent of their variation. Sovereign credit spreads are generally more related to the U.S. stock and high-yield bond markets, global risk premia, and capital flows than they are to their own local economic measures. We find that the excess returns from investing in sovereign credit are largely compensation for bearing global risk, and that there is little or no country-specific credit risk premium. A significant amount of the variation in sovereign credit returns can be forecast using U.S. equity, volatility, and bond market risk premia.

Notes:

Print version record

December 2007.