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How sovereign is sovereign credit risk? Global prices, local quantities

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  • Augustin, Patrick
  • Sokolovski, Valeri
  • Subrahmanyam, Marti G.
  • Tomio, Davide

Abstract

Price fluctuations of sovereign default insurance are dominated by common risks. In contrast, fluctuations in their quantities are primarily explained by country-specific factors. Using net positions in sovereign default insurance contracts for 60 countries between 2008 and 2015, we show that a country’s debt and size explain 75% of cross-country differences in net insured interest. We develop an economic framework showing that high co-movement in prices and low co-movement in quantities can arise jointly only if insurance demand and supply shift in opposite directions in response to global shocks. Positions data support that this evidence is more salient for more intermediated assets.

Suggested Citation

  • Augustin, Patrick & Sokolovski, Valeri & Subrahmanyam, Marti G. & Tomio, Davide, 2022. "How sovereign is sovereign credit risk? Global prices, local quantities," Journal of Monetary Economics, Elsevier, vol. 131(C), pages 92-111.
    • Handle: RePEc:eee:moneco:v:131:y:2022:i:c:p:92-111
    DOI: 10.1016/j.jmoneco.2022.07.005
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    More about this item

    Keywords

    Credit default swaps; Credit risk; Debt; Demand and supply; Over-the-counter;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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