Research
“Corporate-to-Sovereign Credit Risk Spillovers: Evidence from Emerging Markets” (Job Market Paper) [PDF]
The existing literature has documented the pass-through of sovereign risk into corporations’ financing costs. This paper examines how corporations’ credit risks affect those of their sovereigns in nine emerging markets (EMs). I construct a novel data set that combines daily corporate news and credit default swap (CDS) rates on EMs’ sovereign and corporate bonds. A high-frequency event-study analysis shows that a 10% post-news increase in corporate CDS rates leads to a 3% rise in sovereign CDS rates within a one-day event window. Being a state-owned enterprise (SOE), or a corporation operating in a government-dependent sector, or a large corporation adds another 3% rise in sovereign CDS rates. Stress in the domestic banking sector also contributes to higher sovereign CDS rates. Among all channels, being an SOE has the most prominent effect. An extreme value analysis further shows that extreme changes in sovereign CDS rates are more likely when CDS rates of its corporations experience extreme changes, even after controlling for common shocks that affect both corporations and sovereigns.
“Drivers of Sovereign CDS Rates in Emerging Markets: Before, During, and After the Global Financial Crisis,” working paper
I study the drivers of sovereign credit default swap (CDS) rates in a group of seventeen emerging markets (EMs) over July 2004-December 2017, covering the 2007-2009 Global Financial Crisis. I find that a single principal component accounts for 34, 60, 48 percent of the variation in sovereign CDS rates in the pre-, during-, and post-crisis period, respectively. Moreover, panel estimates show that: first, local factors, including stock market returns and exchange rates against the U.S. dollar, are always critical determinants of EMs' sovereign CDS rates; second, stepping into the crisis period, U.S. stock market return and bond market volatility start to affect EMs' sovereign CDS rates significantly; third, after the crisis ends, U.S. stock market return continues its influence, but a broader set of global factors become to play an essential role in driving EMs' sovereign CDS rates.