| This dissertation examines sovereign risk from two different perspectives. The first perspective is called the macroeconomic approach. This approach maps credit ratings of the sovereigns to macroeconomic variables. Our first essay expands on this approach. Specifically, we examine the effects of liquidity in banking system and the degree of competition in the banking sector on sovereign risk. We show that financial system variables such as concentration in banking system, size of financial system, and the liquidity of banking assets are significantly related to sovereign credit ratings.;The second perspective is called the market approach. This approach focuses on frequent assessments of sovereign credit risk by international markets. Usually, the best proxy for these assessments are sovereign bond and credit default spreads (CDS). In our second essay, we expand on the market approach. Throughout the second essay, we adopt a time-series methodology to measure the relationship between sovereign CDS and bond markets. We find that the relationship between sovereign CDS and bond markets has strengthened over time. We also show that bond markets, which are more mature compared to CDS markets, lead CDS markets in general. Our results are different for each country, however the majority of the findings point toward the leading role of bond markets. The reason for some of the puzzling results can be attributed to the newly developing CDS markets. We believe that the more developed and the more liquid CDS markets are, the more efficient the markets will be. |
