The Impact of Political Events on Sovereign Credit Risk

Abstract: The purpose of this study is to determine how political events a ects the perceived credit risk of sovereigns. We estimate the impact of elections, re-elections, govern- ment and nance minister changes on SCDS spreads, using a sample of 32 countries over the years 2009 to 2015. We use daily ve-year SCDS spreads to capture the market reaction for these events. This study di ers from other related papers by focusing on developed economies and speci cally investigates the impact of nance minister change on sovereign credit risk. Our results show that government changes and nance minister changes increases the perceived credit risk by the nancial markets. This occurrence is constrained to the period after the change, while hav- ing no signi cant e ect prior to the political event. Even though the e ect may be triggered by the sovereign debt crises, our ndings imply that the nancial market perceives, on average, political change as non-bene cial in terms of credit risk.