Loriana Pelizzon. (Ca' Foscari) - The Core, the Periphery, and the Disaster: Corporate-Sovereign Nexus in COVID-19 Times

Speaker:  Loriana Pellizzon - Ca' Foscari
  Wednesday, May 12, 2021 at 12:00 PM Zoom Webinar: https://univr.zoom.us/j/82132412438
We study how the COVID-19 pandemic reshaped the relation between corporate and sovereign credit risk in the cross-section of countries in the European Union. Surprisingly, the outbreak triggered higher elasticity of corporate to sovereign CDS spreads in core countries, which realigned to that of peripheral countries, with lower fiscal capacity, for which the impact of the pandemic on the elasticity was essentially muted. During the pandemic, we observe systematic departures of actual CDS from those implied by a standard structural model of default for larger firms in core EU countries with budgetary slackness. We interpret this evidence in light of a disaster-risk asset pricing model with bailout guarantees and defaultable public debt. Based on the model and a synthetic control method, we show that CDS-implied risk-adjusted bailout guarantees over the medium term were about three times larger in the Core than in the Periphery.

Programme Director
Roberto Renò

Publication date
April 28, 2021