Abstract
Credit derivatives are important financial instruments used to transfer credit risk of loans and other assets. Among them stands out the so-called sovereign credit default swap (CDS), which works as a kind of insurance against sovereign credit risk. The international literature has shown a correlation between sovereign CDS, CDS index and stock index. The present study aims to identify and analyze the determinants factors of the Brazilian sovereign credit default swap spreads (CDSs Brazil), from a multiple linear regression model adjusted for the period May 2009 to May 2014. The results show that the S&P 500 has a greater effect on the CDSs Brazil, followed by the factors Bovespa index (Brazilian stock market index), iTraxx index, European index CDS, FX volatility and CDS USA. Moreover, the CDSs Brazil has a positive relationship with the stock indexes and a negative relationship with the other variables, results similar to some studies in the literature.
Highlights
Credit derivatives are financial contracts that work as a protection against financial losses related to credit default
The financial instruments called credit default swaps (CDS) are among the most important credit derivatives products. This is a bilateral contract in which the buyer pays a periodic fee or premium in exchange for a contingent payment by the counterparty in the case of credit event occurs (a review about the CDS market can be seen in Moorad (2006))
The research presented in this paper aims to study the determinants of Brazilian sovereign credit default swap, considering country-specific variables and global variables
Summary
Credit derivatives are financial contracts that work as a protection against financial losses related to credit default. The financial instruments called credit default swaps (CDS) are among the most important credit derivatives products. This is a bilateral contract in which the buyer pays a periodic fee or premium in exchange for a contingent payment by the counterparty (the seller) in the case of credit event occurs (a review about the CDS market can be seen in Moorad (2006)). Many works in the literature have studied the impact of financial variables (as market index and CDS index) on sovereign CDS. Particularity, Tokat and Murat (2009) analyze the impact of the CDS index of high-yield corporate bonds (called iTraxx Crossover–iTraxx XO), on sovereign CDS of emerging markets (Brazil, Turkey and South Africa). The study shows a significant impact of the iTraxx XO index on the pricing dynamics of the sovereign CDS prices
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