The Exodus from Sovereign Risk: Sovereign Ceiling Violations in Credit Default Swap Markets

Lee, Jong-Sub; Naranjo, Andy; Sirmans, Stace

doi:10.2139/ssrn.2237913

Cited by 15 publications

(17 citation statements)

References 33 publications

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“…Almeida et al (2013) show that, following a sovereign downgrade, firms at the sovereign rating bound reduce investment and leverage more than other firms. Lee, Naranjo and Sirmans (2013) explore the role of country-level property rights institutions and disclosure requirements in explaining sovereign ceiling violations. Similarly, Bai and Wei (2012) and, in a later paper, Augustin et al (2014) find that strong country-level property rights institutions weaken the connection between sovereign and corporate credit risk.…”

Section: Introductionmentioning

confidence: 99%

Sovereign and corporate credit risk: Evidence from the Eurozone

Bedendo

Colla

2015

Journal of Corporate Finance

113

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International audienceWe study the impact of sovereign risk on the credit risk of the non-financial corporate sector in the Eurozone using credit default swap data. We show that an increase in sovereign credit spreads is associated with a statistically and economically significant increase in corporate spreads and, hence, firms' borrowing costs. A deterioration in a country's credit quality affects more adversely firms that are more likely to benefit from government aid, those whose sales are more concentrated in the domestic market, and those that rely more heavily on bank financing. Our findings suggest that government guarantees, domestic demand, and credit markets are important credit risk transmission mechanisms

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Section: Introductionmentioning

confidence: 99%

Sovereign and corporate credit risk: Evidence from the Eurozone

Bedendo

Colla

2015

Journal of Corporate Finance

113

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“…Bai and Wei () study the sovereign–corporate risk transmission and argue that the correlation between sovereign and corporate spreads is stronger in countries that have weaker property rights as well as for state‐owned companies. Lee, Naranjo, and Sirmans () show that companies can decouple themselves from sovereign risk, either through foreign investments in countries with better property and creditor rights, or by cross‐listing in countries with more stringent disclosure requirements. In contemporaneous work, Bedendo and Colla () document a positive correlation between sovereign and corporate credit risk.…”

mentioning

confidence: 99%

Sovereign to Corporate Risk Spillovers

Augustin¹,

Boustanifar²,

Breckenfelder³

et al. 2018

J of Money Credit Banking

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The first Greek bailout on April 11, 2010 triggered a significant reevaluation of sovereign credit risk across Europe. We exploit this event to examine the transmission of sovereign to corporate credit risk. A 10% increase in sovereign credit risk raises corporate credit risk on average by 1.1% after the bailout. The evidence is suggestive of risk spillovers from sovereign to corporate credit risk through a financial and a fiscal channel, as the effects are more pronounced for firms that are bank or government dependent. We find no support for indirect risk transmission through a deterioration of macroeconomic fundamentals.

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“…In another study, Lee et al (2013) provide preliminary evidence that average annual sovereign CDS spreads are negatively related to the degree of property and creditor rights and disclosure requirements (i.e. spreads are on average lower for countries with stronger property and creditor rights and more stringent disclosure requirements).…”

Section: Global and Local Risk Factorsmentioning

confidence: 96%

“…Over the last decade, however, there has been an increasing number of sovereign ceiling violations, which means that companies have managed to decouple themselves and to borrow at better rates than their local government in the country of their domicile. The determinants of these sovereign ceiling violations are studied by Lee et al (2013), who show that companies are able to delink their risk profile from that of the local government if they hold foreign assets in jurisdictions with better property and creditor protection rights, and if they are crosslisted in countries with better disclosure requirements. The average difference-in-difference between corporate and sovereign CDS rates is reduced by 26 basis points through the combined exposure to these informational and institutional channels, with a stronger effect during the sovereign crisis.…”

Section: The Relationship Between Sovereign and Corporate Cdsmentioning

confidence: 99%

Credit Default Swaps: A Survey

et al. 2014

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Credit default swaps (CDS) have been growing in importance in the global financial markets. However, their role has been hotly debated, in industry and academia, particularly after the credit crisis of 2008-2009 and the European sovereign crisis of 2010-2012. We review the extant literature on CDS that has accumulated over the past two decades. We divide our survey into seven topics after providing a broad overview in the introduction. The second section traces the historical development of CDS markets and provides an introduction to CDS contract definitions and conventions. The third section discusses the pricing of CDS, from the perspective of no-arbitrage principles as well as from that of structural and reduced-form credit risk models. It also summarizes the literature on the determinants of CDS spreads, with a focus on the role of fundamental credit risk factors, liquidity and counterparty risk. The fourth section discusses how the development of the CDS market has affected the characteristics of the related bond and equity markets, with an emphasis on the closely related concepts of market efficiency, price discovery, information flow and liquidity. Attention is also paid to the CDS-bond basis, the wedge between the pricing of the CDS and its reference bond, and the mispricing between the CDS and the equity market, which leads to a discussion on capital structure arbitrage. The fifth section examines the effect of CDS trading on firms' credit and bankruptcy risk, and how it affects corporate financial policy, including bond issuance, capital structure, liquidity management, and both external and internal corporate governance. The sixth section summarizes the literature that takes into account how CDS may impact the incentives of the various agents in the economy and the associated impact on the pricing of the contracts. In particular, we examine how CDS may alter the debtor-creditor relationship. Section seven reviews the growing literature on sovereign CDS and highlights the major conceptual and contractual differences between the sovereign and corporate CDS markets. In section eight, we discuss CDS indices, especially the role of synthetic CDS index products backed by residential mortgage-backed securities during the financial crisis. We close with our suggestions for promising future research directions on CDS contracts and markets.

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The Exodus from Sovereign Risk: Sovereign Ceiling Violations in Credit Default Swap Markets

Cited by 15 publications

References 33 publications

Sovereign and corporate credit risk: Evidence from the Eurozone

Sovereign and corporate credit risk: Evidence from the Eurozone

Sovereign to Corporate Risk Spillovers

Credit Default Swaps: A Survey

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