We examine the spillover effect of Federal Reserve Board of Governors' speeches on sovereign credit risk and find that the tone of speeches negatively impacts sovereign credit spreads. Speeches that are forward-looking have a stronger impact. Cross-sectionally, the impact is stronger for countries with high external debt and those with high exchange rate stability. We further decompose the sovereign credit spread to examine the impact of speeches on the credit risk premium and find a significant positive impact on it. Our results indicate that while Fed speeches contain important information about economic conditions in the US, they can have a major influence on the perceived creditworthiness of other countries as well.
We examine the spillover effect of Federal Reserve Board of Governors' speeches on sovereign credit risk and find that the tone of speeches negatively impacts sovereign credit spreads. Speeches that are forward-looking have a stronger impact. Cross-sectionally, the impact is stronger for countries with high external debt and those with high exchange rate stability. We further decompose the sovereign credit spread to examine the impact of speeches on the credit risk premium and find a significant positive impact on it. Our results indicate that while Fed speeches contain important information about economic conditions in the US, they can have a major influence on the perceived creditworthiness of other countries as well.
