Sovereign debt risk, government ESG, and bank stock performance

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.