Does economic policy uncertainty drive CDS spreads?

Tomasz Piotr Wisniewski and Brendan John Lambe

International Review of Financial Analysis, 2015, vol. 42, issue C, 447-458

Abstract: This study analyzes the dynamic interactions between changes in economic policy uncertainty and the fluctuations in the cost of credit protection. We find that the differenced iTraxx and CDX indices are Granger-caused by variations in the political environment. Within a vector autoregressive framework, impulse response functions show a significant reaction of the CDS spreads to shocks in the policy risk. Implied in these findings is the possibility that country-level risk can permeate to the corporations. Furthermore, financial institutions and traders should closely monitor political developments in order to better predict the CDS premia.

Keywords: Credit default swaps; Credit protection; Economic policy uncertainty (search for similar items in EconPapers)
JEL-codes: G12 G13 G22 P16 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (57)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:42:y:2015:i:c:p:447-458

DOI: 10.1016/j.irfa.2015.09.009

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