Corruption, news, and sovereign spreads

• Robert Schuman Centre for Advanced Studies
• Department of Political and Social Sciences

Join Aleksei Kiselev as he presents his recent work co-authored with Vladimir Zabolotskiy (University of Bolzano) at the Political Economy Working Group Seminar Series.

Systemic corruption shapes sovereign risk perceptions by eroding economic capacity and signaling the government’s rent-seeking incentives to financial markets. Which of the two factors—reduced ability or commitment to repay debts—matters more to sovereign creditors?

To address this question, Aleksei Kiselev will present his research on sovereign debt and stock market responses to corruption exposés in Russia’s largest state-owned enterprises, including firms of varying asset sizes and tax revenue contributions. The findings show that a series of more than one hundred widely circulated investigations significantly impacted sovereign spreads between 2008 and 2011, independently of the direct fiscal implications of the exposed misconduct.

To quantify the overall effect of revealed corruption on sovereign risk perceptions, Aleksei and his co-author developed a sovereign debt and default model with sequential noisy signals (news) about the government’s commitment to repay debt. The model-derived investors' beliefs predict that sovereign borrowing costs for Russia increased by around 40 basis points, making corruption an important factor in country risk assessment.

Aleksei Kiselev is a research associate at the Florence School of Banking and Finance and a PhD researcher at the EUI’s Economics Department. Vladimir Zabolotskiy is a post-doctoral researcher at the University of Bolzano.