Agnello, Luca, Castro, Vítor, Sousa, Ricardo M. and Hammoudeh, Shawkat (2025) What is the impact of natural disasters on sovereign risk? Expect the unexpected! Finance Research Open. ISSN 3050-7006 (In Press)
Full text not available from this repository.Abstract
Using a rich high-frequency and a cross-country panel of daily sovereign CDS spreads, we employ local projections to estimate the dynamic response of sovereign risk to the occurrence of natural disasters. We find that climatological and, to a lesser extent, hydrological events have a small and short-lived effect on the sovereign CDS spreads. We also explore whether anticipatory effects arise before a disaster unfolds, and confirm that the expectations of imminent disasters do not substantially affect CDS pricing. On the other hand, we show that the sovereign risk is dominated by regional and global financial spillovers, thus reflecting the systemic nature of the sovereign credit markets. Our results also suggest that governments may benefit from developing disaster-specific risk reduction and fiscal resilience strategies, as well as early-warning models that integrate disaster forecasting into risk monitoring frameworks. Sovereigns’ coordination and risk-pooling mechanisms may also be essential in times of regional calamities. Moreover, portfolio hedging strategies should include short-term protective positions in the vulnerable sovereigns during known disaster seasons. Disaster-integrated ESG strategies could also enhance the portfolio resilience.
| Item Type: | Article |
|---|---|
| Additional Information: | © 2025 The Author(s) |
| Divisions: | LSE |
| Subjects: | H Social Sciences > HC Economic History and Conditions G Geography. Anthropology. Recreation > GE Environmental Sciences H Social Sciences > HJ Public Finance |
| JEL classification: | Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics > Q54 - Climate; Natural Disasters H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H30 - General H - Public Economics > H6 - National Budget, Deficit, and Debt > H60 - General |
| Date Deposited: | 23 Jun 2025 15:06 |
| Last Modified: | 24 Jun 2025 08:39 |
| URI: | http://eprints.lse.ac.uk/id/eprint/128535 |
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