Sovereign Default Risk and the U.S. Equity Market

This paper develops a two-country asset pricing model with defaultable firms and governments. This model shows that higher sovereign credit risk in a country depresses equity prices internationally and increases their volatility. The effect is strongest during adverse economic conditions and when firms are close to financial distress. A structural estimation provides evidence that sovereign default risk in Europe affects European and U.S. stock markets through the threat of an economic slowdown.

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Banks’ international assets and sovereign default risk

Journal of Financial Economic Policy ◽

10.1108/jfep-07-2020-0169 ◽

2021 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Filippo Gori

Keyword(s):

Credit Risk ◽

Default Risk ◽

Sovereign Default ◽

Content Type ◽

Sovereign Credit ◽

Developed Economies ◽

Sovereign Default Risk ◽

Sovereign Credit Risk ◽

Using Data ◽

International Assets

Purpose This paper aims to investigate the nexus between banks’ foreign assets and sovereign default risk in a panel of 15 developed economies. The empirical evidence suggests that banks’ foreign exposure is an important determinant of sovereign default probability. Design/methodology/approach Using data from the consolidated banking statistics (total foreign claims on ultimate risk basis) by the Bank of International Settlements, the author constructs a measure of bank international exposure to peer countries. This measure is then used as the target variable in a panel regression for sovereign credit default swaps. The model includes 15 European and non-European developed economies. Identification is discussed extensively in the paper. Findings Quantitatively, a 1% increase in banks’ cross-border claims increases sovereign default risk by about 0.19%. The relationship is weaker when banks are more capitalised. On the other hand, governments are more vulnerable to credit risk spillovers from banks’ international portfolios when having higher debt to GDP ratios. Originality/value To the best of the author’s knowledge, this is the first paper that attempts explicitly to establish an empirical connection between banks’ international assets and sovereign default risk. To the author’s opinion, this paper represents a contribution to our understanding of how sovereign credit risk spills over across countries. It also extends significantly the existing literature on the determinants of sovereign risk (that primarily focused on fundamentals, market characteristics – such as liquidity – and global factors). This paper ultimately sheds some new light on the role of intermediaries in the international transmission of credit risk, also adding to today’s discussion about the linkages between banks and sovereigns.

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Does CDS Premium Most Predict Sovereign Default Risk?

Journal of Derivatives and Quantitative Studies ◽

10.1108/jdqs-03-2014-b0005 ◽

2014 ◽

Vol 22 (3) ◽

pp. 495-530

Author(s):

Ki Beom Binh ◽

Seokjin Woo ◽

Sang Min Lee

Keyword(s):

Financial Crisis ◽

Default Risk ◽

Price Discovery ◽

Sovereign Default ◽

Spot Rate ◽

Discovery Process ◽

Dollar Spot ◽

Sovereign Default Risk ◽

Sovereign Credit Risk ◽

Price Discovery Process

This paper empirically analyzes the price discovery process between Korean sovereign CDS premium, spread of Korean government debt, Won-Dollar currency swap rate, and Won-Dollar FX rate. With the global financial and fiscal crisis, especially in the U.S. and Euro-zone, the interests in sovereign default risk have risen. Interests in CDS, an OTC credit derivative contract based on debt issuer’s default risk, also have increased. A large number of presses have reported that CDS premium would be the best international market indicator for the default risk taken or transferred. However, internationally the CDS market liquidity has not been sufficient enough to validate its properties. Hence, based on empirics, this paper discusses whether Korean sovereign CDS premium can be considered as an appropriate indicator of sovereign credit risk in the Korean economy. Other largely accepted indices which contain the similar information about Korean economic fundamental and Korean external sovereign credit risk are also analyzed and compared: the spread of Korean government debt, Won-Dollar Currency Swap Rate, and Won-Dollar FX rate. Our findings include: (a) in the price discovery process, Won-Dollar spot rate contributes to the price discovery especially most ‘during the financial crisis period’ and the ‘entire period’ (b) Within the period ‘after the financial crisis’, CDS premium and the other indices have mutual influences on the price discovery process higher than the period ‘before the financial crisis’ (c) while Won-Dollar forward rate shows the similar result with Won-Dollar spot rate, NDF rate and CDS premium make the largest mutual influence on price discovery in the period ‘before the financial crisis.’

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Sovereign Default Risk and the US Equity Market

SSRN Electronic Journal ◽

10.2139/ssrn.1719685 ◽

2012 ◽

Cited By ~ 3

Author(s):

Alexandre Jeanneret

Keyword(s):

Default Risk ◽

Equity Market ◽

Sovereign Default ◽

Sovereign Default Risk ◽

The Us

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PREDICTING FINANCIAL DISTRESS IN MALAYSIA AND ITS EFFECT ON STOCK RETURNS

International Journal of Banking and Finance - Vol. 15, Number 2, 2020 ◽

10.32890/ijbf2021.16.2.4 ◽

2021 ◽

Vol 16 (Number 2) ◽

pp. 81-110

Author(s):

Ahmad Harith Ashrofie Hanafi ◽

Rohani Md-Rus ◽

Kamarun Nisham Taufil Mohd

Keyword(s):

Asset Pricing ◽

Stock Returns ◽

Financial Distress ◽

Logit Model ◽

Economic Conditions ◽

Pricing Model ◽

Asset Pricing Model ◽

Distress Risk ◽

Investment Returns ◽

Probability Of Bankruptcy

Unstable economic conditions have an adverse impact on the financial performance of firms, leading to financial distress, which is an unfavourable situation for investors as it may affect their investment returns. Thus, this study attempted to predict financial distress and to examine the effect of financial distress on stock returns by using firms listed on Bursa Malaysia from 1990 to 2020. This study used the logit model to find the probability of bankruptcy and also as a proxy for financial distress risk in the asset pricing model. From this study, financial distress risk was found to be insignificant in pricing stock returns in all tested models. This finding demonstrates that financial distress risk does not affect stock returns since this risk may be eliminated through diversification.

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