SOVEREIGN CREDIT RISK, MACROECONOMIC DYNAMICS, AND FINANCIAL CONTAGION: EVIDENCE FROM JAPAN

2017 ◽  
Vol 21 (8) ◽  
pp. 2096-2120 ◽  
Author(s):  
Zongxin Qian ◽  
Wendun Wang ◽  
Kan Ji
Keyword(s):  
Credit Risk ◽  
Debt Crisis ◽  
Credit Default Swap ◽  
Financial Contagion ◽  
Reverse Causality ◽  
The 2011 Tohoku Earthquake ◽  
Sovereign Credit ◽  
Macroeconomic Fundamentals ◽  
Sovereign Credit Risk ◽  
Global Stock Markets

We try to understand the nature of Japan's sovereign credit risk by examining the interaction between Japan's sovereign credit default swap (CDS) spreads and its financial indicators of macroeconomic fundamentals. We consider potential contagion from the global financial market and allow for reverse causality between CDS spreads and macroeconomic fundamentals. We find strong evidence of contagion from global stock markets to Japan's credit market when Lehman Brothers collapsed, whereas the European sovereign debt crisis only had temporary effects. We also show that several credit events, such as the 2011 Tohoku earthquake and rating cuts by rating agencies, significantly raised volatility in Japan's sovereign CDS market.

scholarly journals The Evolution of the Lead-lag Markets in the Price Discovery Process of the Sovereign Credit Risk: the Case of Italy

2021 ◽  
pp. 151-175
Author(s):  
Michele Anelli ◽  
Michele Patanè ◽  
Mario Toscano ◽  
Alessio Gioia
Keyword(s):  
Credit Risk ◽  
Price Discovery ◽  
Credit Default Swap ◽  
Government Bond ◽  
Counterparty Risk ◽  
Discovery Process ◽  
Sovereign Credit ◽  
Sovereign Credit Risk ◽  
The Government ◽  
Price Discovery Process

Abstract Hedging and speculative strategies play a key role in periods of financial market volatility particularly during economic crises. In such contexts, liquidity problems tend to evolve into potential credit risk events that amplifies the volatility of several markets such as the CDS and the government bond markets. The former, however, generally embodies a higher sensitivity to volatility due to the operators’ uncertainty about unstable and countercyclical counterparty risk. The aim of this paper is to analyze the long-lasting dynamic relationship between credit default swap (CDS) premia and government bond yield spreads (GBS), by focusing particularly on sovereign credit risk, in order to evaluate the lead-lag markets in the price discovery process against the backdrop of a deep financial crisis. The focus of this study concerns the country of Italy, one of the major European countries that suffers from both weak GDP growth and high public debt, which subjects it to volatility and speculation during periods of financial stress. JEL classification numbers: G01, G12, G14, G20. Keywords: CDS spreads, Government bond spreads, Credit risk, Cointegration, Vector error correction model, Granger-causality.

scholarly journals Measuring Sovereign Credit Risk of the EU countries

2021 ◽  
Vol 10 (3) ◽  
pp. 169-192
Author(s):  
Vojtěch Siuda ◽  
Milan Szabo
Keyword(s):  
Credit Risk ◽  
Public Debt ◽  
Financial Stability ◽  
Global Financial Crisis ◽  
Financial Institution ◽  
Debt Crisis ◽  
Balance Sheet ◽  
Sovereign Credit ◽  
Eu Countries ◽  
Sovereign Credit Risk

Abstract European countries have increased significantly their public debt since the Global Financial Crisis. The increasing trend and the high concentration of public debt in portfolios of financial institutions can lead to a financial turmoil we witnessed during the European Sovereign Debt Crisis. Financial stability authorities therefore look for models to measure the sovereign credit risk and develop“what-if”scenarios to assess a potential repercussion of a financial institution rescue or of an economic contraction on sovereign credit risk. The presented article introduces adjustments to the sovereign contingent claims analysis that is based on the Merton´s Credit Risk Model and the Black-Scholes option pricing techniques. The article proposes adjustments by introducing a new view on a stylised liability side of a central government balance sheet, seniority of its items, and a new proxy for risk measure of junior claims. We show reliable results using derived risk sensitivities for 20 EU countries with decent forward looking ability and propose potential stress-testing framework with an application for the Czech Republic.

Interest rate convergence, sovereign credit risk and the European debt crisis: a survey

2017 ◽  
Vol 18 (4) ◽  
pp. 432-442 ◽  
Author(s):  
Mario Gruppe ◽  
Tobias Basse ◽  
Meik Friedrich ◽  
Carsten Lange
Keyword(s):  
Interest Rate ◽  
Credit Risk ◽  
Financial Services ◽  
Debt Crisis ◽  
Empirical Studies ◽  
Special Focus ◽  
Content Type ◽  
Sovereign Credit ◽  
Sovereign Credit Risk ◽  
European Debt Crisis

Purpose This paper aims to briefly review the literature on interest rate convergence and the European debt crisis with a special focus on the current fiscal problems of some governments in Europe. Design/methodology/approach Relevant empirical papers are identified and reviewed focusing on time series analysis techniques. Findings The introduction of the euro has caused interest rate convergence among European Monetary Union (EMU) government bond yields. However, now sovereign credit risk and possibly even redenomination risk have caused divergences in European bond markets. Research limitations/implications A major limitation is that a relatively new field of the literature is surveyed. However, there are enough papers of relevance. This review paper could therefore be helpful in finding new approaches for additional empirical research examining the EMU bond market. Originality/value The results of empirical studies in a relatively new field of the literature are summarized. There meanwhile are some relevant papers. A brief survey of the results of these papers is provided. Important empirical findings with regard to interest rate convergence, sovereign credit risk and redenomination risk in the EMU are discussed and evaluated. The review is especially helpful for researchers and practitioners in the field of managerial finance and risk managers in the financial services industry.

scholarly journals The Role of CDS Market in the Price Discovery Process of the “PIIGS” Countries Sovereign Credit Risk During the Recent Decade of Monetary Easing

2021 ◽  
pp. 1-29
Author(s):  
Michele Anelli ◽  
Michele Patanè
Keyword(s):  
Credit Risk ◽  
Price Discovery ◽  
Credit Default Swap ◽  
Recent Decade ◽  
Government Bond ◽  
Discovery Process ◽  
Sovereign Credit ◽  
Sovereign Credit Risk ◽  
The Government ◽  
Price Discovery Process

Abstract The aim of this paper is to analyze the long-lasting dynamic relationship between the credit default swap (CDS) premia and the government bond spreads (GBS), with regard to the sovereign credit risk. The practical focus is to evaluate whether the CDS market effectively is the leading or the lagging market in the credit risk price discovery process during the last decade of monetary easing. The analysis extends to all “sensitive” countries in the Eurozone, the so-called “PIIGS” countries (excluded Greece) for the interval 2007-2017. JEL classification numbers: G01, G12, G14, G20. Keywords: CDS spread, Government bond spread, Sovereign credit risk, Cointegration, Vector error correction model, Granger-causality.

scholarly journals The COVID-19 pandemic and sovereign credit risk

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Wei-Fong Pan ◽  
Xinjie Wang ◽  
Ge Wu ◽  
Weike Xu
Keyword(s):  
Credit Risk ◽  
Financial Stability ◽  
Developing Economies ◽  
Credit Default Swap ◽  
Content Type ◽  
Sovereign Credit ◽  
Panel Regressions ◽  
Credit Default ◽  
Sovereign Credit Risk ◽  
The Impact

PurposeThe purpose of this study is to examine the effects of the coronavirus disease 2019 (COVID-19) pandemic on sovereign credit default swap (CDS) spreads using a large sample of countries.Design/methodology/approachIn this paper, the authors use a wide set of the sovereign CDS data of 78 countries. To measure the magnitude of the COVID-19 pandemic, the authors use the daily change of confirmed cases collected from Our World in Data. They use panel regressions to estimate the impact of the COVID-19 pandemic on sovereign credit risk.FindingsThe authors show how sovereign CDS spreads have widened significantly in response to the COVID-19 pandemic. Based on the most conservative estimate, a 1% increase in COVID-19 infections leads to a 0.17% increase in sovereign CDS spreads. Furthermore, this effect is stronger for developing countries and countries with worse healthcare systems. Government policies partially offset the impact of the COVID-19 pandemic, although these same policies also lead to widening sovereign CDS spreads. Sovereign CDS spreads narrow dramatically several months after the outbreak of the COVID-19 pandemic. Overall, the results suggest that the ongoing COVID-19 pandemic has been a massive shock to the global financial stability.Originality/valueThis paper provides new evidence that COVID-19 widens sovereign CDS spreads. The authors further show that this widening effect is felt most strongly in developing economies.

scholarly journals An Empirical Analysis of Sovereign Credit Risk Co-movement between Japan and ASEAN Countries

2016 ◽  
Vol 8 (4(J)) ◽  
pp. 6-16 ◽  
Author(s):  
Boonlert Jitmaneeroj ◽  
John Ogwang
Keyword(s):  
Credit Risk ◽  
Sovereign Debt ◽  
Credit Default Swap ◽  
Negative Externalities ◽  
Sovereign Credit ◽  
Credit Risks ◽  
Credit Default ◽  
Sovereign Credit Risk ◽  
Asean Countries ◽  
High Possibility

Japan is the most developed economy in Asia. However, it has been on record for being the most heavily indebted country among OECD countries. In many circumstances, the high sovereign debt level indicates a high possibility of sovereign credit risks associated with investment in government bond. The high sovereign credit risk may also generate a number of negative externalities for private businesses operating in the host country. This paper investigates whether sovereign credit risk of Japan as measured by its sovereign credit default swap (SCDS) can better predict and commove with sovereign credit risk of selected ASEAN countries. The bivariate VAR model was used to test for Granger Causalities among these countries SCDS premiums and correlation analysis to investigate co-movements between SCDS of these countries. The results indicate that Japan’s sovereign credit risks do not co-move with those of ASEAN countries, Furthermore, Sovereign credit risks of ASEAN countries tend to lead those of Japan as evidenced by unidirectional causalities from these countries to Japan. The overall suggestion is that sovereign credit risk of Japan is not likely to influence those of ASEAN. The paper concludes with some implications for businesses.

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