Journal of Finance and Investment Analysis

Second Dimension Risk – A Reduced Form Analysis of European Sovereigns’ Credit Spreads

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•                                                      Abstract
  

  This article analyzes a possible risk premium for uncertainties regarding the current and future default probabilities in the context of the European fiscal crisis. It is argued that this risk premium was an important driver of credit spreads on a singly country level and that it has catalyzed sovereign credit contagion effects in the past. The relevance of this risk premium in the context of the fiscal crisis is then empirically analyzed based on a doubly stochastic reduced form credit risk model.