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:

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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. 2012/024

Subject:

Credit default swap Credit risk Derivative markets Financial crises Financial institutions Financial markets Financial regulation and supervision Money Sovereign bonds

English

Publication Date:

January 1, 2012

ISBN/ISSN:

9781463931865/1018-5941

Stock No:

WPIEA2012024

Pages:

27

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