Pricing of Sovereign Credit Risk : Evidence From Advanced Economies During the Financial Crisis

Author/Editor:

Emre Alper ; Lorenzo Forni ; Marc Gerard

Publication Date:

January 1, 2012

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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

Please address any questions about this title to publications@imf.org