Sovereign risk and the pricing of corporate credit default swaps

Matthias Haerri, Stefan Morkoetter and Simone Westerfeld

Abstract

ABSTRACT

Based on an empirical analysis of European corporations, we investigate the impact of sovereign risk on the pricing of corporate credit risk. In our paper, we show that sovereign credit default swaps (CDSs) are positively correlated with corresponding corporate CDS spreads and are a significant factor in corporate CDS pricing models. We also find that this impact increases throughout the sovereign debt crisis of 2010-11, and it is more distinctive for eurozone countries that were more exposed to the sovereign debt crisis than others. We further observe that this effect is particularly pronounced for corporations with a high dependency on their domestic market.