Asymmetric dynamics in sovereign credit default swaps pricing: evidence from emerging countries

Abstract

PurposeThis paper examines the relationship between sovereign credit default swaps (CDS) and several macroeconomic factors in an asymmetric setting and distinguishes between short-run and long-run impacts. Country-specific factors (e.g. equity index, international reserves, interest rate and industrial production) and global factors (e.g. US stock volatility [VIX], geopolitical risk and oil price) are the main explanatory variables.Design/methodology/approachThis analysis uses a nonlinear autoregressive distributed lag approach that enables us to study both long-run and short-run dynamics.FindingsThis study results show that two country-specific factors (equity index and international reserves) and two global factors (VIX and oil price) are the most important factors and affect CDS asymmetrically.Research limitations/implicationsThe asymmetric relationships between sovereign CDS and variables in bull and bear markets can also be studied. Consideration of asymmetries in the variance could also be a fruitful step taken for further research.Practical implicationsThe findings imply that investors and portfolio managers should design their investment and hedging decisions related to government bonds by taking into account the existence of an asymmetric relationship.Social implicationsMoreover, policymakers can benefit from this asymmetric information in the timing of debt issuance.Originality/valueThis paper examines the relationship between sovereign CDS and several macroeconomic factors in an asymmetric setting and distinguishes between short-run and long-run impacts.