How Sovereign Is Sovereign Credit Risk?

Longstaff, Francis A.; Pan, Jun; Pedersen, Lasse Heje; Singleton, Kenneth J.

doi:10.1257/mac.3.2.75

Cited by 724 publications

(568 citation statements)

References 44 publications

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“…7 Another possible reason is based on the "risk appetite" explanation. Considering that the VKOSPI is a fear gauge measure and that Korea is an open economy, which is sensitive to overseas market shocks, the risk appetite of investors may not be fully explained by domestic market variables but by global market indicators such as the S&P 500 spot return and the VIX (Pan and Singleton, 2008;Longstaff et al, 2011).…”

Section: Empirical Findingsmentioning

confidence: 99%

Effects of the US Stock Market Return and Volatility on the VKOSPI

2015

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The KOSPI (Korea Composite Stock Price Index) 200 options are one of the most actively traded derivatives in the world. This paper empirically examines (a) the statistical properties of the Korea's representative implied volatility index (VKOSPI) derived from the KOSPI 200 options and (b) the macroeconomic and financial variables that can predict the implied volatility process of the index, using augmented heterogeneous autoregressive (HAR) models with exogenous covariates. The results suggest that the elaborate HAR framework is proficient at describing the dynamics of the VKOSPI and that some domestic macroeconomic variables explain the VKOSPI. More importantly, we find that the stock market return and implied volatility index of the US market (i.e., the S&P 500 spot return and the VIX from the S&P 500 options) play a key role in predicting the level of the VKOSPI and explaining its dynamics, and their explanatory power dominates that of domestic macro-finance variables. Further, while the domestic stock market return does not predict the VKOSPI, the US stock market return does so rather well. When two global factors, both the US stock market return and the US implied volatility index, are incorporated into the HAR framework, the model exhibits the best performance in terms of both in-sample fitting and out-of-sample forecasting ability. JEL C22 C50 G14 G15

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Section: Empirical Findingsmentioning

confidence: 99%

Effects of the US Stock Market Return and Volatility on the VKOSPI

2015

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“…Longstaff, Pan, Pedersen, and Singleton (2011) show that sovereign CDS spreads are primarily driven by common factors, including the US stock and high-yield bond markets and global risk premiums, whereas Pan and Singleton (2008) find that the spreads are related to investors' risk appetite associated with global event risk, financial market volatility and macroeconomic policy. Therefore, it is important to identify whether the sovereign CDS spreads and risk reversals of the four economies in this study remain cointegrated in the presence of other macro-financial factors.…”

Section: Exogenous Macro-financial Variablesmentioning

confidence: 99%

Price cointegration between sovereign CDS and currency option markets in the financial crises of 2007–2013

Hui¹,

Fong²

2015

International Review of Economics & Finance

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“…The values of the state variables coincide with the date when VaR q j is observed. The VIX gauges implied volatility of the US stock market but has been recognized as an appropriate measure of global risk aversion that has a significant impact on different financial markets, including that of the sovereign CDS (Longstaff et al 2011). The TED spread is the difference between the 3-month LIBOR and the 3-month T-bill interest rate.…”

Section: Data For Covar and δCovar Estimationmentioning

confidence: 99%