Under-reaction in the sovereign CDS market

Xinjie Wang, Yaqing Xiao, Hongjun Yan and Jinfan Zhang

Journal of Banking & Finance, 2021, vol. 130, issue C

Abstract: The sovereign CDS market has developed rapidly for two decades and currently has a gross notional amount of more than a trillion dollars. We document a strong momentum effect in this market, which cannot be explained by a large set of risk factors. These momentum returns are positively skewed and higher during recessions. Consistent with the interpretation that this momentum effect is due to investors’ initial underreaction to sovereign credit information followed by corrections, our evidence shows that the momentum returns tend to be higher during the months surrounding announcements of credit rating or outlook changes of the underlying countries.

Keywords: Underreaction; Macro information; Sovereign CDS; Predictability; Limits to arbitrage (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:130:y:2021:i:c:s0378426621001503

DOI: 10.1016/j.jbankfin.2021.106191

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