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Quality of government institutions and spreads on sovereign credit default swaps

Hsien-Yi Chen and Sheng-Syan Chen

Journal of International Money and Finance, 2018, vol. 87, issue C, 82-95

Abstract: We examine how the quality of government institutions affects the likelihood of sovereign default. We find both economically and statistically significant adverse effects of country governance indicators on sovereign credit default swap spreads. The evidence suggests that better-quality governance enhances a country’s willingness to repay debt, and hence reduces the probability of sovereign default. The results still hold after we account for potential endogeneity and conduct a number of robustness tests.

Keywords: Institutional quality; Sovereign default; Credit risk (search for similar items in EconPapers)
JEL-codes: E02 F34 G15 G23 H63 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:jimfin:v:87:y:2018:i:c:p:82-95