Sovereign defaults by currency denomination |
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| Institution: | 1. HEC Montréal, Department of Finance, 3000 Côte-Sainte-Catherine, Montréal H3T 2A7, Canada;2. LITEM – TELECOM Ecole de Management and University of Evry, Evry Cedex, France;1. Department of Financial Economics, University of Alicante, 03690 San Vicente del Raspeig, Alicante, Spain;2. Department of Economic Analysis and Finance, University of Castilla la Mancha, 45071 Toledo, Spain;3. Department of Business Administration, University Carlos III, c/Madrid, 126, 28903 Getafe, Madrid, Spain;1. UBS, Bahnhofstrasse 45, 8098 Zurich, Switzerland;2. Swiss National Bank, Börsenstrasse 15, 8001 Zurich, Switzerland |
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| Abstract: | This paper explores the drivers of sovereign default in 100 countries over the period 1996–2012. We build a new data set of sovereign defaults and find that default events for local and foreign currency bonds are equally likely. However, governments default under different economic and financial conditions depending on the currency in which bonds are issued. The explained variation in default probability rises from 43% to 62% when we account for differences in currency denomination. We also provide evidence that global factors and market sentiment, which are known to drive sovereign spreads, do not help explain the probability of sovereign default. Hence, these factors appear to affect the price of sovereign credit risk, although not the risk itself. |
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