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The role of macroeconomic news in sovereign CDS markets: Domestic and spillover news effects from the U.S., the Eurozone and China

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  • Kim, Suk-Joong
  • Salem, Leith
  • Wu, Eliza

Abstract

The impact of domestic and spillover macroeconomic news from the U.S., the Eurozone and China on national sovereign credit default swap (CDS) spreads and spread volatility are examined over a recent period of financial instability from November 2007 to March 2012. We find that better than expected (i.e. good) news tend to reduce sovereign CDS spreads, whilst worse than expected (i.e. bad) news increases spreads. News from the three major economies has significant spillover effects on other national sovereign CDS markets but the volatility responses to domestic news and foreign news from the major economies differ. CDS spread volatility increases in response to all domestic news and good news tends to exert relatively stronger effects than bad news. In contrast, good news from the major economies is market calming and consistently reduces spread volatility and they are also economically more important than bad news. Bad news from China and the Eurozone generally increase volatility in other sovereign CDS markets but bad news from the U.S. has been calming for other sovereign CDS markets in the extended crisis period from 2007 to 2012. Our results suggest that market participants in the market for sovereign credit protection pay more attention to good news than bad news both at home and from the major economies in times of financial instability.

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  • Kim, Suk-Joong & Salem, Leith & Wu, Eliza, 2015. "The role of macroeconomic news in sovereign CDS markets: Domestic and spillover news effects from the U.S., the Eurozone and China," Journal of Financial Stability, Elsevier, vol. 18(C), pages 208-224.
  • Handle: RePEc:eee:finsta:v:18:y:2015:i:c:p:208-224
    DOI: 10.1016/j.jfs.2015.04.008
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    Cited by:

    1. Silva, Paulo Pereira da & Vieira, Carlos & Vieira, Isabel, 2015. "The determinants of CDS open interest dynamics," Journal of Financial Stability, Elsevier, vol. 21(C), pages 95-109.
    2. Bordo, Michael D. & Duca, John V. & Koch, Christoffer, 2016. "Economic policy uncertainty and the credit channel: Aggregate and bank level U.S. evidence over several decades," Journal of Financial Stability, Elsevier, vol. 26(C), pages 90-106.
    3. repec:eee:finsta:v:36:y:2018:i:c:p:336-345 is not listed on IDEAS
    4. repec:eee:finsta:v:33:y:2017:i:c:p:60-70 is not listed on IDEAS
    5. repec:eee:finsta:v:33:y:2017:i:c:p:187-206 is not listed on IDEAS
    6. repec:eee:phsmap:v:506:y:2018:i:c:p:337-349 is not listed on IDEAS
    7. N. G. Glavatskaya (ed.), 2010. "Экономика Переходного Периода. Сборник Избранных Работ. 2003-2009," Books, Gaidar Institute for Economic Policy, edition 1, volume 1, number 1.
    8. repec:pal:assmgt:v:17:y:2016:i:5:d:10.1057_jam.2016.20 is not listed on IDEAS

    More about this item

    Keywords

    Sovereign credit default swap spreads; Sovereign risk; Macroeconomic news spillovers;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • F3 - International Economics - - International Finance

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