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Sovereign vs. Corporate Debt and Default: More Similar than You Think

Author

Listed:
  • Gita Gopinath
  • Josefin Meyer
  • Carmen Reinhart
  • Christoph Trebesch

Abstract

Theory suggests that corporate and sovereign bonds are fundamentally different, also because sovereign debt has no bankruptcy mechanism and is hard to enforce. We show empirically that the two assets are more similar than you think, at least when it comes to high-yield bonds over the past 20 years. We use rich new data to compare high-yield US corporate (“junk”) bonds to high-yield emerging market sovereign bonds 2002-2021. Investor experiences in these two asset classes were surprisingly aligned, with (i) similar average excess returns, (ii) similar average risk-return patterns (Sharpe ratios), (iii) similar default frequency, and (iv) comparable haircuts. A notable difference is that the average default duration is higher for sovereigns. Moreover, the two markets co-move differently with domestic and global factors. US “junk” bond yields are more closely linked to US market conditions such as US stock returns, US stock price volatility (VIX), or US monetary policy.

Suggested Citation

  • Gita Gopinath & Josefin Meyer & Carmen Reinhart & Christoph Trebesch, 2025. "Sovereign vs. Corporate Debt and Default: More Similar than You Think," CESifo Working Paper Series 11799, CESifo.
    • Handle: RePEc:ces:ceswps:_11799
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    File URL: https://www.cesifo.org/DocDL/cesifo1_wpNr11799.pdf
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    More about this item

    Keywords

    sovereign debt and default; default risk; corporate bonds; corporate default; junk bonds; chapter 11; crisis resolution.;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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