TY  - JOUR
AU  - Longstaff,Francis A.
AU  - Pan,Jun
AU  - Pedersen,Lasse H.
AU  - Singleton,Kenneth J.
TI  - How Sovereign is Sovereign Credit Risk?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13658
PY  - 2007
Y2  - December 2007
UR  - http://www.nber.org/papers/w13658
L1  - http://www.nber.org/papers/w13658.pdf
N1  - Author contact info:
Francis Longstaff
UCLA
Anderson Graduate School of Management
110 Westwood Plaza, Box 951481
Los Angeles, CA  90095-1481
Tel: 310/825-2218
Fax: 310/206-5455
E-Mail: francis.longstaff@anderson.ucla.edu

Jun Pan
MIT Sloan School of Management
100 Main Street, E62-624
Cambridge, MA 02142
Tel: 617/253-3083
Fax: 617/258-6855
E-Mail: junpan@mit.edu

Lasse H. Pedersen
NYU Stern Finance
44 West Fourth Street
Suite 9-190
New York, NY 10012
Tel: 212/998-0359
Fax: 212/995-4233
E-Mail: lpederse@stern.nyu.edu

Kenneth J. Singleton
Graduate School of Business
Knight Management Center
Stanford University
Stanford, CA 94305
Tel: 650/723-5753
Fax: 650/725-6152
E-Mail: kenneths@stanford.edu
AB  - We study the nature of sovereign credit risk using an extensive sample of CDS spreads for 26 developed and emerging-market countries. Sovereign credit spreads are surprisingly highly correlated, with just three principal components accounting for more than 50 percent of their variation. Sovereign credit spreads are generally more related to the U.S. stock and high-yield bond markets, global risk premia, and capital flows than they are to their own local economic measures. We find that the excess returns from investing in sovereign credit are largely compensation for bearing global risk, and that there is little or no country-specific credit risk premium. A significant amount of the variation in sovereign credit returns can be forecast using U.S. equity, volatility, and bond market risk premia.
ER  -