We document that the COVID-19 pandemic triggered a surge in the comovement between nonfinancial corporate and sovereign credit default swaps in core European countries, characterized by strong fiscal capacity. In peripheral countries with lower fiscal capacity, the pandemic had essentially no impact on such comovement. We show that this result is primarily explained by a pandemic-induced repricing of widespread government support directed, for the first time, toward nonfinancial corporations. We interpret our findings within an asset pricing framework featuring defaultable corporate and sovereign debts.
accepted in The Review of Asset Pricing Studies
