Working Paper: CEPR ID: DP16750
Authors: Simon Gilchrist; Bin Wei; Vivian Yue; Egon Zakrajsek
Abstract: In this paper, we study the interplay between sovereign risk and global financial risk. We show that a substantial portion of the comovement among sovereign spreads is accounted for by changes in global financial risk. We construct bond-level sovereign spreads for dollar-denominated bonds issued by over 50 countries from 1995 to 2020 and use various indicators to measure global financial risk. Through panel regressions and local projection analysis, we find that an increase in global financial risk causes a large and persistent widening of sovereign bond spreads. These effect are strongest when measuring global risk using the excess bond premium -- a measure of the risk-bearingcapacity of U.S. financial intermediaries. The spillover effects of global financial risk are more pronounced for speculative-grade sovereign bonds.
Keywords: sovereign bonds; cds; global financial risk; excess bond premium; global financial cycle
JEL Codes: E43; E44; F34; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Global Financial Risk (EBP) (F65) | Sovereign Bond Spreads (H63) |
| Global Financial Risk (EBP) (F65) | Speculative-Grade Bond Spreads (G12) |
| Global Financial Risk (EBP) (F65) | Investment-Grade Bond Spreads (G12) |
| 25 basis point shock to EBP (E49) | 5 basis point increase in Investment-Grade Bond Spreads (E43) |
| 25 basis point shock to EBP (E49) | 15 basis point increase in Speculative-Grade Bond Spreads (G19) |
| Global Financial Risk (GFC) (F65) | Sovereign Bond Spreads (H63) |
| Global Financial Risk (VIX) (G17) | Sovereign Bond Spreads (H63) |