Time-frequency comovements between sovereign CDS and exchange rates: The role of sentiments

Chang Liu, Xiaolei Sun and Jianping Li

Global Finance Journal, 2023, vol. 56, issue C

Abstract: This study introduces various bivariate, multiple, and partial wavelet methods to explore the role of inclusive market sentiments in comovements between sovereign credit default swap (CDS) spreads and exchange rates from a time-frequency perspective. The empirical results show that the sovereign CDS spread and exchange rate nexus varies across countries and time-frequency domains. Further, the strong and positive comovements between sovereign CDS spreads and exchange rates are uncovered, concentered at medium- and long-term frequencies, especially in commodity-dependent countries. Among the various market sentiments, Volatility Index and Chicago Board Options Exchange Crude Oil Volatility are revealed as the most critical factors driving the comovements in commodity-dependent countries. The findings provide important recommendations for investors, regulatory authorities, and policymakers to understand the pivotal roles of market sentiments in inducing comovement between sovereign CDS spreads and exchange rates.

Keywords: Sovereign CDS; Exchange rates; Market sentiments; Multiple and partial wavelets (search for similar items in EconPapers)
JEL-codes: F31 F34 G15 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:56:y:2023:i:c:s1044028322000771

DOI: 10.1016/j.gfj.2022.100775

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