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The Journal of Fixed Income

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Article

What Drives Systemic State Credit Risk? Evidence from the State Credit Default Swap (CDS) Market

Sheen Liu, Chunchi Wu, Chung-Ying Yeh and Woongsun Yoo
The Journal of Fixed Income Spring 2019, jfi.2019.1.069; DOI: https://doi.org/10.3905/jfi.2019.1.069
Sheen Liu
is a finance professor in Department of Finance and Management Science at Washington State University at Pullman, WA
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Chunchi Wu
is a finance professor at the School of Management, State University of New York at Buffalo, NY
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Chung-Ying Yeh
is a finance professor in Department of Finance at National Chung Hsing University at Taichung, Taiwan
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Woongsun Yoo
is a finance professor at College of Business and Management, Saginaw Valley State University, MI
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Abstract

In this article, using state credit default swap data, the authors examine the role of common macroeconomic factors in driving systemic sovereign credit risk. Using a structural model with jump risk, the authors demonstrate that co-movement in state economic fundamentals is an important channel of systemic credit risk. Empirical evidence shows that changes in macroeconomic fundamentals explain more variations in state credit spread and its systemic component than do financial market variables. This evidence points to macroeconomic linkages, not financial linkages, as the leading source of systemic state credit risk and suggests that this risk is driven mainly by weakness in economic fundamentals.

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The Journal of Fixed Income: 30 (4)
The Journal of Fixed Income
Vol. 30, Issue 4
Spring 2021
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What Drives Systemic State Credit Risk? Evidence from the State Credit Default Swap (CDS) Market
Sheen Liu, Chunchi Wu, Chung-Ying Yeh, Woongsun Yoo
The Journal of Fixed Income Feb 2019, jfi.2019.1.069; DOI: 10.3905/jfi.2019.1.069

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What Drives Systemic State Credit Risk? Evidence from the State Credit Default Swap (CDS) Market
Sheen Liu, Chunchi Wu, Chung-Ying Yeh, Woongsun Yoo
The Journal of Fixed Income Feb 2019, jfi.2019.1.069; DOI: 10.3905/jfi.2019.1.069
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  • Article
    • Abstract
    • DATA
    • CDS SPREAD REGRESSIONS
    • SYSTEMIC AND NONSYSTEMIC COMPONENTS OF STATE CREDIT RISK
    • CDS SPREAD CO-MOVEMENT AS AN ALTERNATIVE SYSTEMIC RISK MEASURE
    • CONCLUSION
    • ACKNOWLEDGMENTS
    • APPENDIX A
    • APPENDIX B
    • APPENDIX C
    • APPENDIX D
    • ENDNOTES
    • REFERENCES
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