European financial regulation consistently gives governments privileged access to private investors, reflecting the anchor role assigned to sovereign securities as safe and liquid assets for the financial system. Legislative reforms after the financial crisis of 2008 further expanded the...

We quantify the sovereign-bank doom loop by using the 1999 Marmara earthquake as an exogenous shock leading to an increase in Turkey's default risk. Our theoretical model illustrates that for banks with higher exposure to government securities, a higher sovereign default risk implies lower net...

We study whether regulation that relies on historical cost accounting (HCA) rather than mark-to-market accounting (MMA) to insulate banks' net worth from financial market volatility affects the transmission of quantitative easing (QE) through the bank lending channel. Using detailed supervisory...

How does convenience yield interact with sovereign risk and the supply of government bonds? We propose a model of sovereign debt and default in which convenience yield arises because investors are able to pledge government bonds as collateral on financial markets. Convenience yield is dependent...

We construct a sovereign default network by employing high-dimensional vector autoregressions obtained by analyzing connectedness in sovereign credit default swap markets. We develop four measures of centrality, namely, degree, betweenness, closeness, and eigenvector centralities, to detect...

Using a sample of 124 countries assisted by China from 2000 to 2019, this paper examines the impact of foreign aid on outward foreign direct investment (OFDI) and the mitigation mechanism of risk. The research finds that, first, foreign aid can significantly reduce the country risk of recipient...

In this paper, we examine the impact of eurozone membership on sovereign creditworthiness over the period 1996-2017 and the underlying channels through which the impact operates. We find that: (a) eurozone membership improved sovereign credit ratings, on average by over one notch; (b) the...

This paper deals with the proposed use of sovereign credit ratings in the "Basel Accord on Capital Adequacy" (Basel II) and considers its potential effect on emerging markets financing. It investigates in a first attempt the consequences of the planned revisions on the two central aspects of...

This paper investigates the impact of banking prudential regulation on sovereign risk. We show that prudential regulation reduces sovereign risk and induces governments to spend more. As a result, countries with tight prudential regulation have lower primary budget balances and accumulate more...

This paper shows that China has launched a new global system for cross-border rescue lending to countries in debt distress. We build the first comprehensive dataset on China’s overseas bailouts between 2000 and 2021 and provide new insights into China’s growing role in the global financial...

This paper studies how distributional and electoral concerns shape sovereign default incentives within a quantitative model of sovereign debt with heterogeneous agents and non-linear income taxation. The small open economy is characterized by a two-party system in which the left-wing party has a...

As the debt ceiling episode unfolds, we highlight a sharp increase in activity across the U.S. credit default swaps (CDS) market and infer the likelihood of a U.S. default from these market prices. Beginning in January 2023, we document a significant increase in U.S. CDS trading activity and...

In this study, we revisit Uribe's (2006, Journal of Monetary Economics) `fiscal theory of sovereign risk,' which suggests a trade-off between stabilizing inflation and suppressing default. Unlike Uribe (2006), we develop a class of dynamic stochastic general equilibrium models in which the...

Using Credit Default Swaps (CDS) on sovereign bonds, we investigate whether US sovereign default risk is a greater driving factor of domestic interbank funding risk than domestic sovereign default risk across the five Libor counties including Canada and Australia. We use equivalent-country...

Credit rating changes for long-term foreign currency debt may act as a wake-up call with up-grades and downgrades in one country affecting other financial markets within and across national borders. Such a potential (contagious) rating effect is likely to be stronger in emerging market...

In theory, political risk is project‐specific and should be accounted for in the estimation of the expected investment cash flows. But in practice, the political risk associated with this type of investment is typically accounted for implicitly by adjusting the investment's required rate of...

Central counterparty clearing houses (CCPs) provide risk management for OTC transactions. Using a global sample of sovereign credit default swaps (CDS) issued between 2010 and 2017, this paper analyzes the impact of the global structural shift from over-the-counter to voluntary CCP clearing of...

This study tries to predict as accurately as possible CDS risk premia for BRICS countries by utilizing state-of-the-art recurrent neural network architectures. These are ELMAN, NARX, GRU, and LSTM RNNs in the time series setting, taking into account both local and global features. The predictive...

We study the macro-financial relevance of climate transition risks for sovereigns that can materialize as a result of the introduction of low-carbon policies in a trading partner country. We define this notion as climate transition spillover risk, and we apply it to the analysis of the...

We provide novel empirical evidence suggestive of signaling effects of sovereign borrowing on a country's default risk. Using the S\&P sovereign rating as a proxy for default risk, we find significant state-contingent effects of sovereign debt growth on a country's rating, with the state being...

ow do credit default swaps (CDS) affect sovereign debt markets? The answer depends crucially on trading frictions, risk-sharing, arbitrage violations, and spillovers from secondary to primary markets. We propose a sovereign default model where investors trade bonds and CDS over the counter via...

Credit rating agencies collapse high-dimensional borrower characteristics into summaries of creditworthiness, facilitating capital flows. But biases embedded in rating algorithms may lead to misallocation. We test for bias in sovereign credit ratings across a wide array of borrower-country...

This paper examines whether prudential policies help to reduce sovereign bond vulnerability to global spillover risk in ASEAN-4 countries (Indonesia, Malaysia, the Philippines, and Thailand). We measure sovereign vulnerability within a risk connectedness network among sovereign bonds. The direct...

In diesem Paper wird die Entwicklung der Spreads auf Staatsanleihezinsen in der Eurozone vor der Finanzkrise untersucht. Während die Renditespannen auf den europäischen Staatsanleihemärkten bis Mitte der 2000er Jahre bei null lagen, haben sie sich seitdem in vielen Mitgliedstaaten...

This study examined the impact of country-risk factors on bank stock returns in the Middle East and North Africa (MENA) region countries. It also investigated whether Islamic banks differed from conventional banks and whether oil rent significantly moderated the risk-returns nexus. Using data...

This study shows that corporate debt accumulation during credit booms can explain increases in sovereign risk during stress periods. Using detailed firmlevel database across six Eurozone countries, I construct granular instruments for aggregate corporate leverage. Instrumental variable...

This study aims to fill the gap in the literature by specifically investigating the impact of country risk on the credit risk of the banking sectors operating in Brazil, Russia, India, China, and South Africa (BRICS), emerging countries. More specifically, we explore whether the country-specific...

We investigate the link between sovereign credit default swaps (CDS) and currency carry trades. We demonstrate that the term structure of sovereign CDS exhibits a significant explanatory power for crash risk and currency risk. We show that global uncertainty shocks in developed economies have a...

The validation of the Probabilities of Default estimated by a rating system model is particularly challenging in the context of low default portfolios; for example, Sovereign portfolios tend to exhibit a very low number (often zero) of defaults, so that traditional hypothesis tests are...

We study how exchange rate regime affects the relationship between size and composition of sovereign debt and its riskiness. Domestic and foreign sovereign debt carry different exchange rate and default risks, which depend on the exchange regime. We collect data on the 10-year government bond...

I present the case for the relationship between climatic oscillations and sovereign debt crisis between 1970 to 2018. I find strong empirical evidence of a relationship between the Antarctic Oscillation, the Madden-Julian Oscillation, the North Atlantic Oscillation, the Pacific North American...

This paper investigates the impact of banking prudential regulation on sovereign risk. We show that prudential regulation reduces sovereign risk and induces governments to spend more. As a result, countries with tight prudential regulation have lower primary budget balances and accumulate more...