Pricing of Sovereign Credit Risk : Evidence From Advanced Economies During the Financial Crisis
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Summary:
We investigate the pricing of sovereign credit risk over the period 2008-2010 for selected advanced economies by examining two widely-used indicators: sovereign credit default swap (CDS) and relative asset swap (RAS) spreads. Cointegration analysis suggests the existence of an imperfect market arbitrage relationship between the cash (RAS) and the derivatives (CDS) markets, with price discovery taking place in the latter. Likewise, panel regressions aimed at uncovering the fundamental drivers of the two indicators show that the CDS market, although less liquid, has provided a better signal for sovereign credit risk during the period of the recent financial crisis.
Series:
Working Paper No. 12/24
Subject:
Credit risk Cross country analysis Developed countries Financial crisis Fiscal policy Global Financial Crisis 2008-2009 Monetary policy Risk premium Sovereign debt
English
Publication Date:
January 1, 2012
ISBN/ISSN:
9781463931865/1018-5941
Stock No:
WPIEA2012024
Format:
Paper
Pages:
27
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