Exchange rate risk and sovereign debt risk in South Africa: A Regime Dependent Approach

Mathias Manguzvane and Mduduzi Biyase

Economics Working Papers from College of Business and Economics, University of Johannesburg, South Africa

Abstract: We provide novel evidence of the regime specific effect of exchange rate risk on sovereign debt risk in South Africa. Using monthly data from 2008 to 2021 through a Markov regime switching model with time varying probabilities for the transitions, our results show that exchange rate risk matters in determining movements in sovereign debt risk as measured by sovereign credit default swaps (CDS). The results suggest that exchange rate risk exacts a positive and significant impact on sovereign debt risk in both the high risk regime and low risk regime. However, we notice that the magnitude of the impact differs from one regime to the other, implying that sovereign debt risk responds differently to exchange rate risk bull and bear markets

Keywords: Sovereign debt; Exchange rate; Markov Regime Switching Model; credit default swaps (search for similar items in EconPapers)
Pages: 22 pages
Date: 2023, Revised 2023
New Economics Papers: this item is included in nep-opm and nep-rmg
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