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The role of country-specific fundamentals in sovereign CDS spreads: Eastern European experiences

Author

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  • Kocsis, Zalan
  • Monostori, Zoltan
Abstract
We investigate the determinants of sovereign CDS spreads on a sample of Eastern European data. A dynamic hierarchical factor model is used to aggregate information in indicators of economic fundamentals. CDS spreads are regressed on forecasts of factors. We find that domestic fundamentals explain more of CDS spread variance than global factors, largely due to their ability to explain differences in sovereign risk across countries. The effects on CDS spreads are found to be time-varying. In terms of economic significance, the factor of institutional-political strength stands out. We apply the model to study CDS spreads of Poland, Russia and Turkey.

Suggested Citation

  • Kocsis, Zalan & Monostori, Zoltan, 2016. "The role of country-specific fundamentals in sovereign CDS spreads: Eastern European experiences," Emerging Markets Review, Elsevier, vol. 27(C), pages 140-168.
    • Handle: RePEc:eee:ememar:v:27:y:2016:i:c:p:140-168
    DOI: 10.1016/j.ememar.2016.05.003
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    9. Gabriel Caldas Montes & Iven Silva Valpassos, 2018. "Discretionary fiscal policy and sovereign risk," Economics Bulletin, AccessEcon, vol. 38(3), pages 1343-1365.
    10. Fulop, Andras & Kocsis, Zalan, 2023. "News indices on country fundamentals," Journal of Banking & Finance, Elsevier, vol. 154(C).
    11. Mustafa Tevfik KARTAL, 2022. "The Role of Macroeconomic and Market Indicators in Explaining Sovereign Credit Default Swaps (CDS) Spread Changes: Evidence from Türkiye," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 145-164, April.
    12. Montes, Gabriel Caldas & Nicolay, Rodolfo & Pereira, Flavio, 2022. "Does fiscal sentiment matter for sovereign risk?," The Quarterly Review of Economics and Finance, Elsevier, vol. 86(C), pages 18-30.
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    More about this item

    Keywords

    Sovereign CDS spreads; Country-specific fundamentals; Dynamic hierarchical factor model; Eastern Europe;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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