The asymmetric response of sovereign credit default swaps spreads to risk aversion, investor sentiment and monetary policy shocks

Abdallahi M'beirick and Samira Haddou

International Review of Economics & Finance, 2024, vol. 93, issue PB, 244-272

Abstract: This paper investigates the determinants of sovereign credit default swaps spreads in the case of European countries. More specifically, it purposes to yield insight into how sovereign credit default swaps spreads respond to changes in investor sentiment, risk aversion, and monetary policy shocks during different market states. Using monthly data from May 2009 to December 2021 and running the quantile regression model, we show that risk aversion, investor sentiment and monetary policy affect the sovereign credit risk changes, and their effects vary across countries and markets states. More importantly, Risk aversion and monetary policy display the major asymmetric role in explaining CDS premia. However, limited asymmetric explanatory power is shown for investor sentiment. Furthermore, our findings demonstrate that the recent European debt crisis has significantly shaped the sensitivity of the sovereign credit risk spreads to the studied determinants. The findings of this study are helpful for investors in forecasting sovereign European credit spreads and hedging the countries default risk.

Keywords: Sovereign CDS; Quantile regression; Sovereign default risk; Monetary policy; European debt crisis; Asymmetric effects (search for similar items in EconPapers)
JEL-codes: C31 E63 F34 F36 G01 G15 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:93:y:2024:i:pb:p:244-272

DOI: 10.1016/j.iref.2024.03.064

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