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)
"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