Sovereign Default Risk, Overconfident Investors and Diverse Beliefs: Theory and Evidence from a New Dataset on Outstanding Credit Default Swaps

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Main author: Janus, Thorsten
Other authors: Jinjarak, Yothin
Uruyos, Manachaya
Format: Journal Article           
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id eprints-14611
recordtype eprints
institution SOAS, University of London
collection SOAS Research Online
language English
language_search English
description In standard public finance theory a government’s cost of borrowing depends on the common beliefs held by rational investors regarding default risk. We advance understanding of the effects of diverse beliefs and overconfidence among investors in their ability to assess the sovereign’s creditworthiness. Theoretically, we find that demand for insurance against default is positively related to the absolute difference between the market price of sovereign risk and the risk forecasted by the economy’s fundamentals. We find preliminary support for this prediction in a newly available dataset on sovereign credit default swaps (CDSs): after controlling for the size of the public debt, the absolute size of the gap between the actual and forecasted spreads is positively related to the value of outstanding CDSs.
format Journal Article
author Janus, Thorsten
author_facet Janus, Thorsten
Jinjarak, Yothin
Uruyos, Manachaya
authorStr Janus, Thorsten
author_letter Janus, Thorsten
author2 Jinjarak, Yothin
Uruyos, Manachaya
author2Str Jinjarak, Yothin
Uruyos, Manachaya
title Sovereign Default Risk, Overconfident Investors and Diverse Beliefs: Theory and Evidence from a New Dataset on Outstanding Credit Default Swaps
publisher Elsevier
publishDate 2013
url https://eprints.soas.ac.uk/14611/

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