 Emerging markets sovereign CDS spreads during COVID-19: Economics versus epidemiology newsTimo B. Daehler, Joshua Aizenman and Yothin Jinjarak Economic Modelling, 2021, vol. 100, issue C Abstract: Can bad news about COVID-19 induce negative expectations on sovereign credit risks? We investigate the factors driving credit default swap (CDS) spreads of emerging market sovereigns around the outbreak of COVID-19. Using 2014–2019 data, we estimate a two-factor model of global and regional risks and then extrapolate the model-implied spreads for the period July 2019–June 2020. Intriguingly, the model initially predicts the realized spreads well but loses predictive accuracy during the COVID-19 pandemic. Fiscal space and oil-revenue dependence primarily drive the differences between the realized and predicted sovereign spreads. Our augmented-factor model indicates that the cumulative COVID-19 mortality rate growth is positively associated with the CDS spreads. The evidence suggests that the epidemiological deterioration can lower confidence in the sovereign credit markets due to the prospects of prolonged lockdowns and a slower GDP growth recovery. Our results also hold for a single regression of daily spread changes during 2014–2020. Keywords: Emerging markets; Sovereign spreads; Fiscal space; Oil shocks (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:100:y:2021:i:c:s0264999321000936 DOI: 10.1016/j.econmod.2021.105504 Access Statistics for this article Economic Modelling is currently edited by S. Hall and P. Pauly More articles in Economic Modelling from Elsevier |
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