SOVEREIGN CREDIT RISK, MACROECONOMIC DYNAMICS, AND FINANCIAL CONTAGION: EVIDENCE FROM JAPAN. (24th October 2017)

• Record Type: Journal Article
• Authors: Qian, Zongxin; Wang, Wendun; Ji, Kan
• Is Part Of: Macroeconomic dynamics. Volume 21:Number 8(2017)
• Page Start: 2096
• Page End: 2120
• Publication Date: 2017-10-24
• Subjects: Credit Default Swap Spread, -- Financial Contagion, -- Japan, -- Regime Switch; Macroeconomics -- Periodicals; 339.05
• DOI: 10.1017/S1365100516000122
• Languages: English
• ISSNs: 1365-1005

Abstract

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.