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Does sovereign risk matter? New evidence from eurozone corporate bond ratings and zero‐volatility spreads
Author(s) -
Klein Christian,
Stellner Christoph
Publication year - 2014
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2013.08.006
Subject(s) - bond , credit risk , corporate bond , european debt crisis , volatility (finance) , monetary economics , financial system , sovereignty , business , economics , credit rating , financial crisis , european union , finance , economic policy , macroeconomics , european integration , politics , political science , law
Abstract In this paper, we empirically examine if sovereign risk matters for corporate bonds in developed economies. Using a unique panel data sample of 897 corporate bonds from eleven countries within the Economic and Monetary Union (EMU), we investigate sovereign and corporate ratings as well as zero‐volatility spreads (z‐spreads). In the time period from March 2006 to June 2012, we find sovereign risk to be a significant driver of corporate risk. The effect is stronger for companies with domestic revenue structure, for companies that are (partly) owned by the government, and companies active in the utility and transportation sector. Interestingly, the impact of sovereign risk on corporate risk during the acute European sovereign debt crisis period decreases if ratings are examined, but increases if z‐spreads are utilized. Rating agencies seem to take a more differentiated view on individual company risk during the sovereign debt crisis, while institutional investors might want to reduce their exposure to a country in financial distress as a whole, regardless of whether sovereign or corporate bonds are held.