Journal article
What is the Impact of Natural Disasters on Sovereign Risk? Expect the Unexpected
Finance Research Open, v 1(3), 100026
Sep 2025
Abstract
•We use daily data and local projections to study how disasters affect sovereign risk.•Climatological and hydrological events slightly and briefly raise CDS spreads.•Imminent disaster expectations do not meaningfully move CDS spreads.•Regional and global spillovers dominate sovereign risk, showing systemic effects.•Governments need disaster plans and coordination and ESG portfolios hedge sovereigns.
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.
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Details
- Title
- What is the Impact of Natural Disasters on Sovereign Risk? Expect the Unexpected
- Creators
- Luca Agnello - University of PalermoVítor Castro - Loughborough UniversityRicardo M. Sousa - University of MinhoShawkat Hammoudeh - Drexel University
- Publication Details
- Finance Research Open, v 1(3), 100026
- Publisher
- Elsevier
- Resource Type
- Journal article
- Language
- English
- Academic Unit
- Economics (School of Economics)
- Other Identifier
- 991022061554104721