Title: Economic and Financial Determinants of Credit Risk Premiums in the Sovereign CDS Market
Abstract: We specify and estimate no-arbitrage models that value sovereign CDS contracts by assuming that the country's default intensity depends on observable economic and financial indicators. We estimate these models using a sample of twenty-eight countries, three CDS maturities, and over a decade of daily data. The models provide a good fit. The impact of the economic and financial variables on spreads varies substantially across countries and over time, but is consistent with economic intuition. Spreads increase as a function of stock market and exchange rate volatility, but decrease as a function of interest rates and stock market returns. Estimated risk premiums are highly time-varying and peak during the 2008 financial crisis for nearly all countries. For European countries the risk premiums are also high during the Eurozone debt crisis. In periods of market stress and high CDS spreads, the increase in market risk aversion is even larger than the increase in default probabilities. The cross-sectional variation in risk premiums across countries is high, also in non-crisis periods.
Publication Year: 2014
Publication Date: 2014-01-01
Language: en
Type: article
Indexed In: ['crossref']
Access and Citation
Cited By Count: 6
AI Researcher Chatbot
Get quick answers to your questions about the article from our AI researcher chatbot