Sovereign tail risk |
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| Institution: | 1. School of Economics and Management, Wuhan University, Luojia Hill, Wuchang District, Wuhan, Hubei 430072, China;2. Financial Services Research Centre, Lazaridis School of Business and Economics, Wilfrid Laurier University, Waterloo, Ontario N2L 3C5, Canada;3. College of Business, Washington State University, Vancouver, WA 98686, United States;1. Accounting and Finance Department, United Arab Emirates University, P.O. Box 15551, Al-Ain, United Arab Emirates;2. South Ural State University, Lenin Prospect 76, Chelyabinsk 454080, Russian Federation;3. Nottingham University Business School, University of Nottingham Malaysia Campus, Semenyih, Malaysia;4. Teesside University Business School, Teesside University, Middlesbrough, United Kingdom;5. Trinity Business School, Trinity College Dublin, Ireland;6. University of Economics Ho Chi Minh City, Ho Chi Minh City, Viet Nam;7. Jiangxi University of Finance and Economics, China;8. University of Abu Dhabi, Zayed City, United Arab Emirates;9. PNU Business School, Pusan National University, Busan, Republic of Korea;10. UniSA Business, University of South Australia, Adelaide, Australia |
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| Abstract: | We provide a new measure of sovereign country risk exposure (SCRE) to global sovereign tail risk based on information incorporated in 5-year sovereign CDS spreads. Our panel regressions with quarterly data from 53 countries show that macro risks have strong explanatory power for SCRE. Results show that SCRE increases for countries with less fiscal space, higher interest rates, and financial stability concerns. Exposure sensitivity to public sector leverage is shown to increase non-linearly with public debt and to decrease with central banks’ sovereign debt programs. Our results imply that good forward-looking macro-finance fundamentals, such as high expected GDP growth and low credit-to-GDP ratios protect countries against sovereign risk especially in times of global distress. |
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| Keywords: | Sovereign debt crisis Exposure Panel data analysis |
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