The Joint Behavior of Sovereign CDS Spreads and Country Equity Risk: an Empirical Analysis

Authors

  • Patrizia Stucchi Department of Economics and Statistics University of Udine Via Tomadini, 30 33100 Udine (UD)

DOI:

https://doi.org/10.14665/1614-4007-21-1-002

Keywords:

Country Risk, Country Equity, Conditional Value at Risk, Sovereign Credit Default Swap, Risk Measures

Abstract

Starting from the Merton structural model it is possible to show that an in- verse relationship holds between rms CDS spreads and their equity premium. My work investigates empirically if the relation holds also for countries.

To this aim, I have considered the daily CDS spreads on the 5 years government bonds of a set of countries (Brazil, China, Greece, Italy, Russia and US) and compared year by year their behavior with that of the countries daily equity premium dened in terms of Conditional Value at Risk (CVaR) over the period 2006-2012. The results conrm a strong inverse relationship between CDS spreads and equity risk premium.

Published

2015-01-03

Issue

Section

Papers