Regime-switching determinants of emerging markets sovereign credit risk swaps spread

Jason Z. Ma, Xiang Deng, Kung-Cheng Ho and Sang-Bing Tsai

No 2018-52, Economics Discussion Papers from Kiel Institute for the World Economy

Abstract: Using the Markov regime switching approach, the authors investigate the dependency of short term sovereign credit default swap (SCDS) spread changes on a nation's country-specific fundamental factors, local, regional and macroeconomic global factors. They find that the significance of the determinants of SCDS spread changes differ across the two states of our regime-switching model. Specifically, in the "good" state the weekly SCDS spread changes are mainly determined by local, regional and fundamental factors; whereas global variables have stronger influence in the "bad" regime. In particular, US market returns play a dominant role in influencing the SCDS spread change in the "bad" state suggesting loss aversion and flight to quality behavior of investors. The authors then examine the cross-sectional differences of the above regime switching effect based on country-specific characters and find that the regime switching effect is associated with a nation's country-specific characters such as openness, economic size, etc.

Keywords: sovereign credit default swap (SCDS); emerging market; Markov regime switching; credit risk; economics (search for similar items in EconPapers)
JEL-codes: A10 F30 G10 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwedp:201852

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