The theoretical literature remains inconclusive on whether changes in bank exposure towards the domestic sovereign have an adverse effect on the sovereign risk position via a diabolic loop in the sovereign-bank nexus or reduce perceived default risk by acting as a disciplinary device for the...

In this paper, we propose a new method to assess the impact of sovereign ratings on sovereign bond yields. We estimate the impulse response of the interest rate, following a change in the rating. Since ratings are ordinal and moreover extremely persistent, it proves difficult to estimate those...

This paper explores the economic determinants of market-assessed sovereign risk of members of the European monetary union. The empirical work is innovative in its Merton structural specification of appropriate inputs. It provides a theoretical background for the empirical investigation of...

We identify the determinants of all German banks' sovereign debt exposures between 2005 and 2013 and test for the implications of these exposures for bank risk. Larger, more capital market affine, and less capitalised banks hold more sovereign bonds. Around 15% of all German banks never hold...

Political risk relates to both the ability and the willingness of governments to repay debts. We find that bond prices only slowly adapt to changes in political risk. The expected bond returns for countries whose political risk ratings have improved are higher than those for countries whose...