Interpreting sovereign spreads

BIS Quarterly Review  |  March 2007  | 
14 March 2007
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 |  13 pages

Sovereign spreads can be broken up into two components: the expected loss from default and the risk premium, with the latter reflecting how investors price the risk of unexpected losses. We show that the risk premium is often the larger part of the spread.

JEL classification: G15, F34.