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SOVEREIGN CREDIT RISK, MACROECONOMIC DYNAMICS, AND FINANCIAL CONTAGION: EVIDENCE FROM JAPAN
Published online by Cambridge University Press: 24 October 2017
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.
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- Copyright © Cambridge University Press 2017
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).
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