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Regime-Switching Determinants for Spreads of Emerging Markets Sovereign Credit Default Swaps

Jason Z. Ma (), Xiang Deng (), Kung-Cheng Ho () and Sang-Bing Tsai ()
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Jason Z. Ma: School of Finance, Collaborative Innovation Center of Industrial Upgrading and Regional Finance (Hubei), Zhongnan University of Economics and Law, 182 South Nanhu Rd., Wuhan 430073, China
Xiang Deng: School of Finance, Zhongnan University of Economics and Law, 182 South Nanhu Rd., Wuhan 430073, China
Kung-Cheng Ho: School of Finance, Zhongnan University of Economics and Law, 182 South Nanhu Rd., Wuhan 430073, China
Sang-Bing Tsai: Zhongshan Institute, University of Electronic Science and Technology of China, Zhongshan 528402, China

Sustainability, 2018, vol. 10, issue 8, 1-17

Abstract: Using the Markov regime switching approach, we investigate the dependency of short term sovereign credit default swap (SCDS) spread changes on a nation’s country-specific fundamental factors, local, regional and macroeconomic global factors. We find that the significance of the determinants of SCDS spread changes differ across the two states of our regime-switching model. Specifically, in the good state, the weekly SCDS spread changes are mainly determined by local, regional and fundamental factors; whereas global variables have a stronger influence in the bad regime. In particular, US market returns play a dominant role in influencing the SCDS spread change in the bad state suggesting loss aversion and flight–to–quality behavior of investors. We then examine the cross-sectional differences of the above regime switching effect based on country-specific characters and find that the regime switching effect is associated with a nation’s country-specific characters such as openness, economic size and so forth.

Keywords: sovereign credit default swap (SCDS); emerging market; markov regime switching; credit risk; risk assessment; risk measures (search for similar items in EconPapers)
JEL-codes: Q Q0 Q2 Q3 Q5 Q56 O13 (search for similar items in EconPapers)
Date: 2018
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