International Journal of Empirical Research Methods

ISSN NO : 2995-6110

The International Journal of Empirical Research Methods is dedicated to promoting and advancing empirical research methodologies across various disciplines. This journal aims to provide a platform for researchers, scholars, educators, and practitioners to share insights, methodologies, and findings that contribute to the improvement of empirical research practices and the enhancement of evidence-based decision-making.

Submit Your Article Editorial Board
  • 101
    Views
  • 0
    CrossRef citations to date

The Determinants of Sovereign Credit Default Swaps (CDS) Spreads

1 Swansea Business Campus, UWTSD, High Street, Swansea SA1 1NE,United Kingdom

Volume 1

Issue 2

Page: [79 - 107]

Published Online: September 13, 2024

Download Full Article ()
Creative Commons

  • Abstract

    The paper examines the determinants of sovereign CDS spreads
    for 19 different primary sovereigns from January 2009 to December
    2018, using several macroeconomic variables. We apply a
    panel vector autoregressive (PVAR) model using a system-generalized
    method of moment (System-GMM) methodology, to analyse
    the relationship between the CDS spreads and its macroeconomic
    determinants. Our model combines both local factors, such
    as GDP growth rate, import, export, inflation rate, the balance
    of payment, and government external debt with global factors
    such as S&P 500 Index (SP500) returns, CBOE Market Volatility
    Index (VIX), and 10-year U.S. Treasury. We find that both local
    (such as inflation and government external debt), and global
    (e.g., VIX) determinants of sovereign CDS spreads are statistically
    significant through various periods for most maturities.

    Keywords: Sovereign CDS pricing Panel vector autoregressive model Generalized method of moment

  • Figures

    Figure Image

  • References

      Aizenman, J., Hutchison, M., & Jinjarak, Y., 2013.
      What is the risk of European sovereign
      debt defaults? Fiscal space, CDS
      spreads, and market pricing of risk.
      Journal of International Money and
      Finance, 34, 37-59.
      https://doi.org/10.1016/j.jimonfin.
      2012.11.011
      Akaike, H., 1969. Fitting autoregressive models
      for prediction. Annals of the Institute
      of Statistical Mathematics, 21(1),
      243-247.
      https://doi.org/10.1007/
      BF02532251
      Andrews, D. W. K., & Lu, B., 2001. Consistent
      model and moment selection procedures
      for GMM estimation with application
      to dynamic panel data models.
      Journal of Econometrics, 101(1),
      123-164.
      https://doi.org/10.1016/S0304-
      4076(00)00077-4
      Annaert, J. M, De Ceuster, M., Van Roy, P., & Vespro,
      C., 2013. What determines Euro
      area bank CDS spreads. Journal of
      International Money and Finance,
      32, 444-461.
      https://doi.org/10.1016/j.jimonfin.
      2012.05.029
      Apergis, N., 2015. Forecasting Credit Default
      Swaps (CDS) spreads with newswire
      messages: Evidence from European
      countries under financial distress.
      Economics Letters ,136, 92-94.
      https://doi.org/10.1016/j.econlet.
      2015.08.032
      Apergis, N., Lau, M. C. K., & Yarovaya, L., 2016.
      Media sentiment and CDS spread
      spillovers: Evidence from the GIIPS
      countries. International Review of Financial
      Analysis, 47, 50-59.
      https://doi.org/10.1016/j.
      irfa.2016.06.010
      Avramov, D., Jostova, G., & Philipov, A., 2007.
      Understanding changes in corporate
      credit spreads. Financial Analysts
      Journal, 63(2), 90-105.
      https://doi.org/10.2469/faj.v63.
      n2.4525
      Baek, I. M., Bandopadhyaya, A., & Du, C., 2005.
      Determinants of market-assessed
      sovereign risk: Economic fundamentals
      or market risk appetite? Journal
      of International Money and Finance,
      24(4), 533-548.
      https://doi.org/10.1016/j.jimonfin.
      2005.03.007
      Baldacci, E., Gupta, S., & Mati, A., 2011. Political
      and fiscal risk determinants of sovereign
      spreads in emerging markets.
      Review of Development Economics,
      15(2), 251-263.
      https://doi.org/10.1111/j.1467-
      9361.2011.00606.x
      Basazinew, S. T., & Vashkevich, A., 2013. Relationship
      between sovereign credit
      default swap and stock markets-The
      Case of East Asia. Business AdministrationUmeå
      School of Business and
      Economics (USBE), p. 87.
      Baum, C. F., & Wan, C., 2010. Macroeconomic
      uncertainty and credit default swap
      spreads. Applied Financial Economics,
      20,1163-1171.
      https://doi.
      org/10.1080/09603101003781455
      Beirne, J., & Fratzscher, M., 2013. The pricing of
      sovereign risk and contagion during
      the European sovereign debt crisis.
      Journal of International Money and
      Finance, 34, 60-82.
      https://doi.org/10.1016/j.jimonfin.
      2012.11.004
      Blanco, R., Brennan, S. & Marsh, I.W., 2005. An
      empirical analysis of the dynamic
      relation between investment-grade
      bonds and credit default swaps. Journal
      of Finance, 60(5), 2255-2281.
      https://doi.org/10.1111/j.1540-
      6261.2005.00798.x
      Blommestein, H., Eijffinger, S., & Qian, Z., 2016.
      Regime-dependent determinants of
      Euro area sovereign CDS spreads.
      Journal of Financial Stability, 22, 10-
      21.
      https://doi.org/10.1016/j.
      jfs.2015.11.004
      Campbell, J. Y., & Taksler, G. B., 2003. Equity
      volatility and corporate bond yields.
      The Journal of Finance, 58(6), 2321-
      2350.
      https://doi.org/10.1046/j.1540-
      6261.2003.00607.x
      Can, H., & Paskaleva, M., 2017. Macroeconomic
      Determinants of CDS: The Case
      of Europe. (Online) Academic Publishing
      House “Talent “University of
      Agribusiness and Rural Development
      - Bulgaria. New Knowledge Journal
      of Science, ISSN 2367-4598.
      Cantor, R., & Packer, F., 1996. Determinants and
      impact of sovereign credit ratings.
      Economic policy review, 2(2).
      https://doi.org/10.1111/j.1468-
      036X.1996.tb00040.x
      Chan-Lau, J. A., & Kim, Y. S., 2004. Equity pricStrategic
      Financial Review
      Volume 1, Issue 2
      104
      es, credit default swaps, and bond
      spreads in emerging markets. Working
      paper. Washington, DC: International
      Monetary Fund.
      https://doi.org/10.2139/
      ssrn.564241
      Chan, K. C., Fung, H. G., & Zhang, G., 2009. On
      the relationship between Asian credit
      default swap and equity markets.
      Journal of Asian Business Studies,
      4(1), 2-11.
      https://doi.
      org/10.1108/15587890980000414
      Chen, L., Lesmond, D. A., & Wei, J., 2007. Corporate
      yield spreads and bond liquidity.
      The Journal of Finance, 62(1), 119-
      149.
      https://doi.org/10.1111/j.1540-
      6261.2007.01203.x
      Chiaramonte, L., & Casu, B., 2013. The determinants
      of bank CDS spread: Evidence
      from the financial crisis. European
      Journal of Finance, 19, 861-887.
      https://doi.org/10.1080/135184
      7X.2011.636832
      Cimadomo, J., Claeys, P., & Ribeiro, M., 2016.
      How do experts forecast sovereign
      spreads?. European EconomicReview,
      87, 216-235.
      https://doi.org/10.1016/j.euroecorev.
      2016.03.002
      Collin-Dufresn, P., Goldstein, R. S., & Martin, J.
      S., 2001. The determinants of credit
      spread changes. The Journal of Finance,
      56(6), 2177-2207.
      https://doi.org/10.1111/0022-
      1082.00402
      Corò, F., Dufour, A., & Varotto, S., 2013. Credit
      and liquidity components of corporate
      CDS spreads. Journal of Banking
      and Finance, 37, 5511-5525.
      https://doi.org/10.1016/j.jbankfin.
      2013.07.010
      Das, S. R., Hanouna, P., & Sarin, A., 2009.
      Accounting-based versus market-
      based cross-sectional models of
      CDS spreads. Journal of Banking and
      Finance, 33, 719-730.
      https://doi.org/10.1016/j.jbankfin.
      2008.11.003
      Delatte, A.L., Gex, M., & LA˜3pez-Villavicencio,
      A., 2012. Has the CDS market influenced
      the borrowing cost of European
      countries during the sovereign
      crisis? Journal of International Money
      and Finance, 31(3), 481-497.
      https://doi.org/10.1016/j.jimonfin.
      2011.10.008
      Di Cesare, A., & Guazzarotti, G., 2010. An analysis
      of the determinants of credit
      default swap spread changes before
      and during the subprime financial
      turmoil. Bank of Italy Temi di Discussione
      (Working Paper) No, 749.
      https://doi.org/10.2139/
      ssrn.1670045
      Dieckmann, S., & Plank, T., 2012. Default risk
      of advanced economies: an empirical
      analysis of credit default swaps
      during the financial crisis. Review of
      Finance, 16 (4),903-934.
      https://doi.org/10.1093/rof/rfr015
      Elton, E. J., Gruber, M. J., Agrawal, D., & Mann, C.,
      2001. Explaining the rate spread on
      corporate bonds. Journal of finance,
      56(1), 247-277.
      https://doi.org/10.1111/0022-
      1082.00324
      Ericsson, J., Jacobs, K., & Oviedo, R., 2009. The
      determinants of credit default swaps
      premia. Journal of Financial and
      Quantitative Analysis, 44, 109-132.
      h t t p s : / / d o i . o r g / 1 0 . 1 0 1 7 /
      S0022109009090061
      Eyssell, T., Fung, H. G., & Zhang, G., 2013. Determinants
      and price discovery of China
      Strategic Financial Review
      Volume 1, Issue 2
      105
      sovereign credit default swaps. China
      Economic Review, 24, 1-15.
      https://doi.org/10.1016/j.chieco.
      2012.09.003
      Fabozzi, F. J., Cheng, X., & Chen, R.-R., 2007. Exploring
      the components of credit risk
      in credit default swaps. Finance Research
      Letters, 4, 10-18.
      h t t p s : / / d o i . o r g / 1 0 . 1 0 1 6 / j .
      frl.2006.10.002
      Fender, I., Hayo, B., & Neuenkirch, M., 2012. Daily
      pricing of emerging market sovereign
      CDS before and during the global
      financial crisis. Journal of Banking
      & Finance, 36(10), 2786-2794.
      https://doi.org/10.1016/j.jbankfin.
      2012.06.017
      Forte, S., & Pe˜na, J. I., 2009. Credit spreads:
      An empirical analysis on the informational
      content of stocks, bonds,
      and CDS. Journal of Banking and Finance,
      33, 2013-2025.
      https://doi.org/10.1016/j.jbankfin.
      2009.04.015
      Fung, H. G., Sierra, G. E., Yau, J., & Zhang, G.,
      2008. Are the stock market and
      credit default swap market related?
      Evidence from the CDX indices.
      Journal of Alternative Investments,
      11(1), 43-61.
      https://doi.org/10.3905/
      jai.2008.708849
      Galariotis, E. C., Makrichoriti, P., & Spyrou, S.,
      2016. Sovereign CDS spread determinants
      and spillover effects during
      financial crisis: A panel VAR approach.
      Journal of Financial Stability,
      26, 62-77.
      https://doi.org/10.1016/j.
      jfs.2016.08.005
      Galil, K., & Soffer, G., 2011. Good news, bad news
      and rating announcements: An empirical
      investigation. Journal of Banking
      & Finance, 35(11), 3101-3119.
      https://doi.org/10.1016/j.jbankfin.
      2011.04.010
      Galil, K., Shapir, O. M., Amiram, D., & Ben-Zion,
      U., 2014. The determinants of CDS
      spreads. Journal of Banking and Finance,
      41,271-282.
      https://doi.org/10.1016/j.jbankfin.
      2013.12.005
      Georgievska, A., Georgievska, L., Stojanovic, A.,
      & Todorovic, N., 2008. Sovereign rescheduling
      probabilities in emerging
      markets: a comparison with credit
      rating agencies’ ratings. Journal
      of Applied Statistics, 35(9), 1031-
      1051.
      https://doi.
      org/10.1080/02664760802193112
      Guesmi, K., Dhaoui, A., Goutte, S., & Abid, I.,
      2018. On the determinants of industry-
      CDS index spreads: Evidence
      from a nonlinear setting. Journal of
      International Financial Markets, Institutions
      and Money, 56, 233-254.
      https://doi .org/10.1016/j.intfin.
      2018.01.005
      Hamilton, J. D., 1994. Time Series Analysis.
      Prentice Hall New Jersey 1994. SFB
      373(Chapter 5), 837-900.
      Hannan, E. J., & Quinn, B. G., 1979. The Determination
      of the Order of an Autoregression.
      Journal of the Royal Statistical
      Society. Series B (Methodological).
      WileyRoyal Statistical Society.
      https://doi.
      org/10.1111/j.2517-6161.1979.
      tb01072.x
      Hansen, L. P., 1982. Large Sample Properties of
      Generalized Method of Moments Estimators
      Author (s): Lars Peter Hansen
      Reviewed work (s): Published
      by: The Econometric Society. Econometrica,
      50(4), 1029-1054.
      https://doi.org/10.2307/1912775
      Strategic Financial Review
      Volume 1, Issue 2
      106
      Hilscher, J., & Nosbusch, Y., 2010. Determinants
      of Sovereign Risk: Macroeconomic
      Fundamentals and the Pricing of Sovereign
      Debt. Review of Finance,14,
      235-262.
      https://doi.org/10.1093/rof/rfq005
      Ho, S. H., 2016. Long and short-runs determinants
      of the sovereign CDS spread
      in emerging countries. Research in
      International Business and Finance,
      36, 579-590. https://doi.org/10.108
      0/14697688.2020.1865558.
      https://doi.org/10.1080/14697688.
      2020.1865558
      Hull, J. C., Predescu, M., & White, A., 2004. The
      relationship between credit default
      swaps spreads, yields bonds and
      credit rating announcements. Journal
      of Banking and Finance, 28,
      2789-2811.
      https://doi.org/10.1016/j.jbankfin.
      2004.06.010
      Kalbaska, A., & Gątkowski, M., 2012. Eurozone
      sovereign contagion: Evidence from
      the CDS market (2005-2010). Journal
      of Economic Behavior & Organization,
      83(3), 657-673.
      h t t p s : / / d o i . o r g / 1 0 . 1 0 1 6 / j .
      jebo.2012.05.010
      Longstaff, F. A., Pan, J., Pedersen, L. H., & Singleton,
      K. J., 2011. How sovereign
      is sovereign credit risk? American
      Economic Journal: Macroeconomics,
      3(2), 75-103.
      https://doi.org/10.1257/mac.3.2.75
      Love, I., & Zicchino, L., 2006. Financial development
      and dynamic investment behavior:
      Evidence from panel VAR.
      Quarterly Review of Economics and
      Finance, 46(2), 190-210
      h t t p s : / / d o i . o r g / 1 0 . 1 0 1 6 / j .
      qref.2005.11.007
      Lutkephol, H., 2005. New Introduction to Multiple
      Time Series Analysis. Available at:
      10.1007/978-3-540-27752-1.
      Markose, S. M., Giansante, S., Gatkowski, M., &
      Shaghaghi, A. R., 2010. Too interconnected
      to fail: Financial contagion
      and systemic risk in network
      model of CDS and other credit enhancement
      obligations of us banks.
      University of Essex, Department of
      Economics, Discussion Paper Series
      683.
      Medina, R. S, Ponce, A. A, Martinez, P. P, & Pietro,
      F. D., 2016. Determinants of bank
      CDS spreads in Europe. Journal of
      Economics and Business, 86, 1-15.
      https://doi.org/10.1016/j.jeconbus.
      2016.03.001
      Mellios, C., & Paget-Blanc, E., 2006. Which factors
      determine sovereign credit ratings?,
      The European Journal of Finance,
      12(4), 361-377.
      https://doi.
      org/10.1080/13518470500377406
      Naifar, N., 2012. Modeling the dependence structure
      between default risk premium,
      equity return volatility and the jump
      risk: Evidence from a financial crisis.
      Economic modelling, 29(2), 119-
      131.
      https://doi.org/10.1016/j.econmod.
      2011.08.026
      Narayan, P. K., 2015. An analysis of sectoral equity
      and CDS spreads. Journal of International
      Financial Markets, Institutions
      and Money, 34, 80-93.
      https://doi.org/10.1016/j.intfin.
      2014.10.004
      Narayan, P. K., Sharma, S. S., & Thuraisamy, K.
      S., 2014. An analysis of price discovery
      from panel data models of CDS
      and equity returns. Journal of Banking
      and Finance, 41, 167-177.
      https://doi.org/10.1016/j.jbankfin.
      2014.01.008
      Strategic Financial Review
      Volume 1, Issue 2
      107
      Norden, L., & Weber, M., 2004. Informational efficiency
      of credit default swap and
      stock markets: The impact of credit
      rating announcements. Journal of
      Banking & Finance, 28(11), 2813-
      2843.
      https://doi.org/10.1016/j.jbankfin.
      2004.06.011
      Norden, L., & Weber, M., 2009. The co-movement
      of credit default swap, bond and
      stock markets: An empirical analysis.
      European financial management,
      15(3), 529-562.
      https://doi.org/10.1111/j.1468-
      036X.2007.00427.x
      Pan, J., & Singleton, K. J., 2008. Default and Recovery
      Implicit in the Term Structure
      of Sovereign CDS Spreads. Journal
      of Finance, 63(5), 2345-2384.
      https://doi.org/10.1111/j.1540-
      6261.2008.01399.x
      Pereira, J., Sorwar, G., & Nurullah, M., 2014.
      What drives corporate CDS spreads?
      Comparison across U.S., U.K. and
      Euro-zone markets. In Proceedings
      of the 2014 annual meeting of the
      European financial management association
      (EFMA).
      Pires, P., Pereira, J. P., & Martins, L. F., 2015. The
      empirical determinants of credit default
      swap spreads: A quantile regression
      approach. European Financial
      Management, 21, 556-589.
      https://doi.org/10.1111/j.1468-
      036X.2013.12029.x
      Ramos-Francia, M., & Rangel, J. G., 2012. Revisiting
      the effects of country specific
      fundamentals on sovereign default
      risk. Economics Bulletin, 32(4),
      3008-3016.
      Rapach, D. E., Strauss, J. K., & Zhou, G., 2013.
      International stock return predictability:
      what is the role of the United
      States? The Journal of Finance,
      68(4), 1633-1662.
      https://doi.org/10.1111/jofi.12041
      Schwarz, G., 1978. Estimating the Dimension of a
      Model. The Annals of Statistics, 6(2),
      461-464.
      https://doi.org/10.1214/
      aos/1176344136
      Srivastava, S., Lin, H., Premachandra, I. M., &
      Roberts, H., 2016. Global risk spillover
      and the predictability of sovereign
      CDS spread: International
      evidence. International Review of
      Economics & Finance, 41, 371-390.
      h t t p s : / / d o i . o r g / 1 0 . 1 0 1 6 / j .
      iref.2015.10.047
      Zhu, H., 2006. An empirical comparison of credit
      spreads between the bond market
      and the credit default swap market.
      Journal of Financial Services Research,
      29(3), 211-235.
      https://doi.org/10.1007/s10693-
      006-7626-x

  • Article Metrics

    Views

    101

  • Copyright and Permissions

    At Guinness Press, authors retain the copyright for all articles published in our journals. These articles are licensed under the open-access Creative Commons CC BY 4.0 license, granting free access for reading and download. Additionally, the original published version must be appropriately cited when reusing or quoting the article. These terms ensure widespread accessibility while ensuring proper attribution to the authors.

    All content published by Guinness Press is safeguarded by international copyright and intellectual property regulations. We kindly request that you honor these protections when utilizing our materials.

    For further information, please contact us at info@guinnesspress.org.