Sovereign Credit Default Swaps and U.S. Economic Policy Uncertainty After the Global Financial Crisis

Abstract

AbstractThis paper empirically investigates factors for sovereign credit default swap (CDS) spreads as a proxy for sovereign credit risk. We focus on U.S. economic policy uncertainty as a global factor and employ weekly data following the global financial crisis. In addition, we highlight the difference between advanced and emerging economies. The results show that U.S. economic policy uncertainty index changes influenced sovereign CDS spreads during quantitative easing (QE) 1 in emerging economies and during QE2 and QE3 in advanced economies. The U.S. stock index and the VIX affected the sovereign CDS spreads for all subsample periods in emerging economies, except QE2. This suggests that U.S. financial market factors are more important than economic policy uncertainty for the sovereign credit risk in emerging economies.KeywordsSovereign CDS spreadsU.S. economic policy uncertaintyGlobal riskLarge-scale asset purchasesEmerging economies