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The Dynamics of Sovereign Credit Risk

Published online by Cambridge University Press:  23 December 2015

Alexandre Jeanneret
Alexandre Jeanneret*
Affiliation:
[email protected], HEC Montréal, Department of Finance, 3000 Côte-Sainte-Catherine, Montréal, QB H3T 2A7, Canada.
*
*Corresponding author: [email protected]
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Abstract

This article proposes a structural model for sovereign credit risk with endogenous sovereign debt and default policies. A maximum-likelihood estimation of the model with local stock market prices generates daily model-implied sovereign spreads. This approach explains two-thirds of the daily variation in observed sovereign spreads for emerging and European economies over the 2000–2011 period. Global factors help to further explain the time variation in sovereign credit risk. In particular, sovereign spreads in emerging markets vary with U.S. market uncertainty, whereas European spreads depend on Euro-zone bond factors.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 5 , October 2015 , pp. 963 - 985
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

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