TY - JOUR T1 - Sovereign Risk Spillover into Euro Corporate Spreads JF - The Journal of Fixed Income SP - 51 LP - 74 DO - 10.3905/jfi.2014.24.1.051 VL - 24 IS - 1 AU - Jay Hyman AU - António Baldaque da Silva AU - Yael Eisenthal-Berkovitz AU - Amine El Khanjar AU - Anando Maitra AU - Simon Polbennikov Y1 - 2014/06/30 UR - https://pm-research.com/content/24/1/51.abstract N2 - We document and quantify the spillover of sovereign risk onto corporate credits throughout the Eurozone. We characterize the dynamics of spread movement in Euro corporates and show how this has changed over time due to the effects of the sovereign crisis. We show that when analyzing risk exposures in a portfolio of European corporate bonds, it has become important to partition by country, in addition to, or even instead of, partitioning by industry. We document a clear relationship between the peer spreads of corporate bonds in a given country over industry-matched German corporates and the sovereign spread of the country of domicile: Once sovereign spreads exceed 100 bp, every additional 100 bp of sovereign spread is associated with about 50 bp of corporate peer spread. We introduce changes to the POINT Global Risk Model that account for the sovereign risk exposures in European corporate bonds. We document the advantages of the specific model selected for implementation over several possible alternatives, and provide some examples of the effect of the new model on projected portfolio risk. How much sovereign exposure is embedded in a given corporate bond position? We propose a model that can be applied at the level of individual issuers, both for purposes of hedging the sovereign risk in a corporate portfolio, and for the decomposition of corporate spreads into sovereign and corporate components.TOPICS: Fixed income and structured finance, developed ER -