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The effect of economic and political uncertainty on sovereign CDS spreads

Author

Listed:
  • Pan, Wei-Fong
  • Wang, Xinjie
  • Xiao, Yaqing
  • Xu, Weike
  • Zhang, Jinfan

Abstract

This study examines the effect of economic and political uncertainty on sovereign CDS spreads using a novel panel index of world uncertainty. We document that sovereign CDS spreads widen with uncertainty. A 1% increase in uncertainty leads to a 0.86% increase in sovereign CDS spreads. Furthermore, the effect of uncertainty on sovereign CDS spreads is stronger for developed countries, countries with investment-grade credit ratings, and during non-crisis periods. The banking sector is a potential channel through which uncertainty increases sovereign risk. Overall, our results suggest that economic and political uncertainty contributes to both local and global components of sovereign CDS spreads.

Suggested Citation

  • Pan, Wei-Fong & Wang, Xinjie & Xiao, Yaqing & Xu, Weike & Zhang, Jinfan, 2024. "The effect of economic and political uncertainty on sovereign CDS spreads," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 143-155.
    • Handle: RePEc:eee:reveco:v:89:y:2024:i:pa:p:143-155
    DOI: 10.1016/j.iref.2023.07.110
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    Keywords

    Sovereign CDS spread; Political uncertainty; Economic uncertainty;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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