Title: Channels of sovereign risk spillovers and investment in the manufacturing sector
Authors: Sebastian H M Deininger - University of Basel (Switzerland) [presenting]
Dietmar Maringer - University of Basel (Switzerland)
Abstract: The aim is to identify endogenous as well as exogenous indicators of firms' investment activity, and examine, in particular, the effect that these variables have in co-determining firms' long-term investment decisions. For this purpose, a panel vector autoregressive model extended by exogenous variables (PVARX) is applied. Two channels of spillovers from sovereign risk to the firms capital expenditures are defined. The first channel, the direct channel, describes responses in capital expenditures from an innovation in sovereign risk. The second channel, the indirect channel, is a transmission mechanism in which risk spillovers from changes in sovereign risk indirectly affect a firm's capital expenditures via its market risk and profitability. While the direct risk channel is observed to be of major importance in Emerging and Developing Economies, it is comparatively small in Advanced Economies. In the case of the latter, contagion from changes in sovereign risk on a firm's market risk plays a much more important role.