The effect of economic and political uncertainty on sovereign CDS spreads

Wei-Fong Pan, Xinjie Wang, Yaqing Xiao, Weike Xu and Jinfan Zhang

International Review of Economics & Finance, 2024, vol. 89, issue PA, 143-155

Abstract: This study examines the effect of economic and political uncertainty on sovereign CDS spreads using a novel panel index of world uncertainty. We document that sovereign CDS spreads widen with uncertainty. A 1% increase in uncertainty leads to a 0.86% increase in sovereign CDS spreads. Furthermore, the effect of uncertainty on sovereign CDS spreads is stronger for developed countries, countries with investment-grade credit ratings, and during non-crisis periods. The banking sector is a potential channel through which uncertainty increases sovereign risk. Overall, our results suggest that economic and political uncertainty contributes to both local and global components of sovereign CDS spreads.

Keywords: Sovereign CDS spread; Political uncertainty; Economic uncertainty (search for similar items in EconPapers)
JEL-codes: E44 G10 G18 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:89:y:2024:i:pa:p:143-155

DOI: 10.1016/j.iref.2023.07.110

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