Work

Sovereign debt risk, government ESG, and bank stock performance

Year: 2025

Type: article

Abstract: This study investigates how sovereign debt risk affects bank stock performance and how government ESG moderates this relationship. Using monthly data for 578 listed banks in 22 major economies (2008–2022), we find that higher sovereign debt risk reduces returns and increases volatility, with results robust to alternative measures, crisis-period exclusions, and an instrumental variables approach based on sovereign credit rating changes and neighboring countries’ sovereign debt risk. We develop a time-varying factor copula framework and a CoEDP-based systemic risk indicator to capture the spillover effects of foreign sovereign debt risk. A China case study shows substantial spillovers into its banking sector, especially after 2017. These findings highlight the need for policymakers to monitor sovereign risks and use government ESG as a mitigation tool.

Source: Journal of Asian Economics

DOI: 10.1016/j.asieco.2025.102079

Authors: Qingfu Liu, Lei Lu, Yiuman Tse, Chuanjie Wang

Institutions: Fudan University, Shanghai Institute for Mathematics and Interdisciplinary Sciences, University of Missouri–St. Louis, Shanghai University of Finance and Economics

Language: English

Topic: Credit Risk and Financial Regulations

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $3,190

Funder: National Natural Science Foundation of China