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)
Longstaff, Francis A., Jun Pan, Lasse H. Pedersen, and Kenneth J. Singleton.
"How Sovereign Is Sovereign Credit Risk?"
American Economic Journal: Macroeconomics,
International Lending and Debt Problems
International Financial Markets
Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
International Linkages to Development; Role of International Organizations
Socialist Institutions and Their Transitions: Financial Economics