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

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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.

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  • 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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    More about this item

    Keywords

    Sovereign CDS spreads; Country-specific fundamentals; Dynamic hierarchical factor model; Eastern Europe;

    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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