The Drivers of Credit Default Swap Prices: Evidence from Selected Emerging Market Countries

Abstract

In this study, we empirically investigate the relationship between credit default swap (CDS) spreads and financial market indicators belonging to bond, equity, and foreign exchange markets for the selected emerging market countries. This study has several findings. The empirical results suggest that the CDS spreads have a cointegrating relationship with the remaining financial market indicators for the whole sample. Another finding that deserves particular attention is that in the long run, the CDS spread is negatively related with the CDS market uncertainties. We argue that this negative relationship indicates low liquidity in the elevated uncertainty, which decreases CDS prices. The time-varying effects of each variable on the CDS spread are in line with the results obtained from the cointegration analyses. These findings have several implications for investors and policymakers in emerging market countries.

Credit default swaps and sovereign debt markets

“…Aguilar andHö rdahl (1998) andCastré n andStefano (2005) investigated the integration of foreign exchange markets, while studies by Baele et al (2004) and Adam et al (2002) examined the integration of money markets within the EU countries. Ertugrul and Ozturk (2013) also explored the cointegrating relationship between CDS premiums and financial market indicators belonging to bond, equity, and foreign exchange markets for selected emerging market countries (e.g. Brazil, Bulgaria, Mexico, Russia, South Africa, and Turkey).…”

Determinants of Russia’s Sovereign Risk

“…Empirical analyses of the determinants of Russia's sovereign risk have also been conducted by Chuffart and Hooper (2019), Ertugrul and Ozturk (2013), Kocsis andMonostori (2016), andStolbov (2017). Among the relevant factors are various global and regional risk indicators (the Volatility Index of the Chicago Board Options Exchange (VIX), the CDS spreads of other countries, etc.)…”

“…and some local macroeconomic factors (the rouble exchange rate, the size of foreign exchange reserves, the index of the Russian equities market, the oil price, and changes in Russia's credit rating), however, not all of the studies confirm significance of each of them. Ertugrul and Ozturk (2013) consider only financial market factors as determinants of the CDS of different EMEs and find that the Russian CDS spread is significantly affected by the VIX, the volatility of CDS, and the EMBI+ index for Russia in both the short and long run, and by the Russian equity market index in the short run. Stolbov (2017) includes macroeconomic factors in the list of potential variables as well, but does not include, for example, the size of the external debt, the size of the budget surplus, exchange rate volatility, or the real price of oil.…”

The explanatory factors of sovereign credit default swaps spreads: A quantile regression approach

“…Indeed, the analyses carried out in this direction, notably by Kalbaska (2013), Heinz and Sun (2014), Zeman (2014), Artus and Rodado (2012), Manganelli andWolswijk (2009), Attinasi et al (2009), Afonso, et al (2012Afonso, et al ( , 2015, Ertugrul andOzturk (2013), Ordonez-Callamand et al (2017), Arellano el al. (2017), Debarsy et al (2018), Chaumont (2018), Mpapalika and Malikane (2019), used different methodologies and chose different explanatory variables to explain these spreads.…”