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dc.contributor.authorAizenman, Joshuaen
dc.contributor.authorHutchison, Michaelen
dc.contributor.authorJinjarak, Yothinen
dc.date.accessioned2011-03-01-
dc.date.accessioned2012-09-28T12:41:17Z-
dc.date.available2012-09-28T12:41:17Z-
dc.date.issued2011-
dc.identifier.urihttp://hdl.handle.net/10419/64488-
dc.description.abstractWe estimate the pricing of sovereign risk for a large number of countries within and outside of Europe, before and after the global financial crisis, based on fiscal space and other economic fundamentals. We measure how accurately the model predicts CDS spreads based on fundamentals, and determine whether the model explains spreads equally well in the Euro zone countries, and the PIIGS in particular, as elsewhere in the world. We validate that fiscal space has been an important determinant of market-based sovereign risk, and find evidence of mispricing in PIIGS given current fiscal space and other current fundamentals: unpredicted low CDS in tranquil period and unpredicted high during global crisis period, especially 2010 when sovereign debt crisis swept over Euro area. To gain further insight, we match the PIIGS with 5 middle income countries outside Europe that, before the crisis (2007), were closest in terms of fiscal space (debt/tax). We find that PIIGS default risk is priced much higher than the matched countries in 2010, even allowing for differentials in fundamentals. A possible interpretation of this finding is that the market is pricing not on current fundamentals but future fundamentals, expecting the PIIGS fiscal space to deteriorate markedly. The adjustment challenges of the PIIGS may be viewed as economically and politically more difficult due to exchange rate inflexibility that is not a constraint in the matched group of the middle income countries.en
dc.language.isoengen
dc.publisher|aUniversity of California, Economics Department |cSanta Cruz, CAen
dc.relation.ispartofseries|aWorking Paper |x676en
dc.subject.jelE43en
dc.subject.jelF30en
dc.subject.jelG01en
dc.subject.jelH63en
dc.subject.ddc330en
dc.subject.keywordCDS spreadsen
dc.subject.keywordsovereign risken
dc.subject.keywordfiscal spaceen
dc.subject.keywordPIIGS and the Euro areaen
dc.subject.keywordfiscal spaceen
dc.subject.stwFinanzmarktkriseen
dc.subject.stwÖffentliche Schuldenen
dc.subject.stwInsolvenzen
dc.subject.stwRisikoen
dc.subject.stwWelten
dc.titleWhat is the risk of European sovereign debt defaults? Fiscal space, CDS spreads and market mispricing of risk-
dc.typeWorking Paperen
dc.identifier.ppn647513501en
dc.rightshttp://www.econstor.eu/dspace/Nutzungsbedingungenen

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