Determinants and hedging effectiveness of China's sovereign credit default swaps

Taurai Muvunza and Yong Jiang

International Journal of Finance & Economics, 2023, vol. 28, issue 2, 2074-2087

Abstract: In this study, we examine determinants and hedging effectiveness of China's sovereign credit default swaps (CDS) spread from January 2010 to April 2020. While both domestic and global factors are important variables that explain China's CDS in changes and levels, we find that global variables have more explanatory power compared to China's domestic economic factors. Analysis of Markov regime‐switching results demonstrate that MSCI Asia is a good indicator for China's CDS spread during tranquil state while gold is a more relevant predictor in the turbulent state. Our results further indicate that domestic variables determine China's CDS spread better than global variables during crisis period. Using dynamic conditional correlation (DCC) GARCH model, we show that China's CDS are a strong hedge and effective diversifier for domestic and international stock market indexes.

Date: 2023
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