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American Economic Journal: Macroeconomics: Vol. 3 No. 2 (April 2011)

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How Sovereign Is Sovereign Credit Risk?

Article Citation

Longstaff, Francis A., Jun Pan, Lasse H. Pedersen, and Kenneth J. Singleton. 2011. "How Sovereign Is Sovereign Credit Risk?" American Economic Journal: Macroeconomics, 3(2): 75-103.

DOI: 10.1257/mac.3.2.75

Abstract

We study the nature of sovereign credit risk using an extensive set of sovereign CDS data. We find that the majority of sovereign credit risk can be linked to global factors. A single principal component accounts for 64 percent of the variation in sovereign credit spreads. Furthermore, sovereign credit spreads are more related to the US stock and high-yield markets than they are to local economic measures. We decompose credit spreads into their risk premium and default risk components. On average, the risk premium represents about a third of the credit spread. (JEL F34, G15, O16, O19, P34)

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Authors

Longstaff, Francis A. (UCLA)
Pan, Jun (MIT)
Pedersen, Lasse H. (NYU)
Singleton, Kenneth J. (Stanford U)

JEL Classifications

F34: International Lending and Debt Problems
G15: International Financial Markets
O16: Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
O19: International Linkages to Development; Role of International Organizations
P34: Socialist Institutions and Their Transitions: Financial Economics

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American Economic Journal: Macroeconomics


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