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SOVEREIGN CREDIT RISK, MACROECONOMIC DYNAMICS, AND FINANCIAL CONTAGION: EVIDENCE FROM JAPAN

Published online by Cambridge University Press:  24 October 2017

Zongxin Qian
Affiliation:
Renmin University of China
Wendun Wang*
Affiliation:
Erasmus University Rotterdam and Tinbergen Institute
Kan Ji
Affiliation:
Utrecht University
*
Address correspondence to: Wendun Wang, Econometric Institute, Erasmus University Rotterdam, P.O. Box 1738, 3000 DR Rotterdam, the Netherlands; e-mail: wang@ese.eur.nl.

Abstract

We try to understand the nature of Japan's sovereign credit risk by examining the interaction between Japan's sovereign credit default swap (CDS) spreads and its financial indicators of macroeconomic fundamentals. We consider potential contagion from the global financial market and allow for reverse causality between CDS spreads and macroeconomic fundamentals. We find strong evidence of contagion from global stock markets to Japan's credit market when Lehman Brothers collapsed, whereas the European sovereign debt crisis only had temporary effects. We also show that several credit events, such as the 2011 Tohoku earthquake and rating cuts by rating agencies, significantly raised volatility in Japan's sovereign CDS market.

Type
Articles
Copyright
Copyright © Cambridge University Press 2017 

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Footnotes

We would like to thank the editor, an associate editor, and the anonymous referee for their constructive comments and suggestions. We are also grateful to Dick van Dijk, Andreas Pick, Wing Wah Tham, and seminar participants at Renmin University of China for useful comments. The first author acknowledges National Natural Science Foundation of China for financial support (Project No. 71303246).

References

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