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The asymmetric response of sovereign credit default swaps spreads to risk aversion, investor sentiment and monetary policy shocks

Author

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  • M'beirick, Abdallahi
  • Haddou, Samira
Abstract
This paper investigates the determinants of sovereign credit default swaps spreads in the case of European countries. More specifically, it purposes to yield insight into how sovereign credit default swaps spreads respond to changes in investor sentiment, risk aversion, and monetary policy shocks during different market states. Using monthly data from May 2009 to December 2021 and running the quantile regression model, we show that risk aversion, investor sentiment and monetary policy affect the sovereign credit risk changes, and their effects vary across countries and markets states. More importantly, Risk aversion and monetary policy display the major asymmetric role in explaining CDS premia. However, limited asymmetric explanatory power is shown for investor sentiment. Furthermore, our findings demonstrate that the recent European debt crisis has significantly shaped the sensitivity of the sovereign credit risk spreads to the studied determinants. The findings of this study are helpful for investors in forecasting sovereign European credit spreads and hedging the countries default risk.

Suggested Citation

  • M'beirick, Abdallahi & Haddou, Samira, 2024. "The asymmetric response of sovereign credit default swaps spreads to risk aversion, investor sentiment and monetary policy shocks," International Review of Economics & Finance, Elsevier, vol. 93(PB), pages 244-272.
    • Handle: RePEc:eee:reveco:v:93:y:2024:i:pb:p:244-272
    DOI: 10.1016/j.iref.2024.03.064
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    More about this item

    Keywords

    Sovereign CDS; Quantile regression; Sovereign default risk; Monetary policy; European debt crisis; Asymmetric effects;
    All these keywords.

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • G01 - Financial Economics - - General - - - Financial Crises

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