Abstract
Sovereign credit default swap (CDS) spreads exhibit strong co-movements across Asian countries and regions, including both emerging and developed economies. After controlling for global impacts, we examine the regional lead-lag relationships among changes in ten Asian sovereign CDS spreads. We use the pairwise Granger causality test to find that lagged changes in Kazakhstan’s sovereign CDS spreads significantly predict changes in other Asian sovereign CDS spreads. By estimating the news-diffusion model, we find evidence that this predictive relationship may be explained by information diffusion. Furthermore, we find that lagged changes in Kazakhstan’s CDS spreads have significant out-of-sample predictive power for other Asian economies, providing practical implications for sustainable investments and risk management.
Highlights
A credit default swap (CDS) is a type of protection guarantee or contract where its buyer provides a payment to its seller, which is commonly known as the CDS spread
They found that the credit spreads in these three countries are strongly related to the Volatility Index (VIX) of the Chicago Board Options Exchange (CBOE)
Longstaff et al (2011 [8]) analyzed the CDS dataset from multiple countries. They claimed that U.S macroeconomic factors affect sovereign credit spreads more than local factors do in each country
Summary
A credit default swap (CDS) is a type of protection guarantee or contract where its buyer provides a payment to its seller, which is commonly known as the CDS spread. We show that adding changes in Kazakhstan’s spreads delivers statistically significant out-of-sample gains for most Asian economies These results together indicate Kazakhstan’s leading role in the Asian sovereign CDS market. Our results provide evidence that Kazakhstan plays a leading regional role in the Asian sovereign CDS market after controlling for global impacts from the U.S The lead-lag relationships are both statistically significant and economically meaningful for predicting changes in other Asian sovereign spreads. Kazakhstan is a contiguous transcontinental country in Central Asia with some parts of its land in Europe, meaning that it has different trade partners than the other Asian economies in our sample This unique feature may attract some European CDS market investors, and, its sovereign CDS spreads may contain some information that is not captured by those in other Asian markets.
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