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The COVID-19 pandemic and sovereign credit risk

Author

Listed:
  • Wei-Fong Pan
  • Xinjie Wang
  • Ge Wu
  • Weike Xu

Abstract

Purpose - The purpose of this study is to examine the effects of the coronavirus disease 2019 (COVID-19) pandemic on sovereign credit default swap (CDS) spreads using a large sample of countries. Design/methodology/approach - In this paper, the authors use a wide set of the sovereign CDS data of 78 countries. To measure the magnitude of the COVID-19 pandemic, the authors use the daily change of confirmed cases collected from Our World in Data. They use panel regressions to estimate the impact of the COVID-19 pandemic on sovereign credit risk. Findings - The authors show how sovereign CDS spreads have widened significantly in response to the COVID-19 pandemic. Based on the most conservative estimate, a 1% increase in COVID-19 infections leads to a 0.17% increase in sovereign CDS spreads. Furthermore, this effect is stronger for developing countries and countries with worse healthcare systems. Government policies partially offset the impact of the COVID-19 pandemic, although these same policies also lead to widening sovereign CDS spreads. Sovereign CDS spreads narrow dramatically several months after the outbreak of the COVID-19 pandemic. Overall, the results suggest that the ongoing COVID-19 pandemic has been a massive shock to the global financial stability. Originality/value - This paper provides new evidence that COVID-19 widens sovereign CDS spreads. The authors further show that this widening effect is felt most strongly in developing economies.

Suggested Citation

  • Wei-Fong Pan & Xinjie Wang & Ge Wu & Weike Xu, 2021. "The COVID-19 pandemic and sovereign credit risk," China Finance Review International, Emerald Group Publishing Limited, vol. 11(3), pages 287-301, May.
    • Handle: RePEc:eme:cfripp:cfri-01-2021-0010
    DOI: 10.1108/CFRI-01-2021-0010
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    Citations

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    Cited by:

    1. Yu, Zehui & Li, Yiming & Dai, Lihua, 2023. "Digital finance and regional economic resilience: Theoretical framework and empirical test," Finance Research Letters, Elsevier, vol. 55(PA).
    2. Zhang, Wenwen & Cao, Shuo & Zhang, Xuan & Qu, Xuefeng, 2023. "COVID-19 and stock market performance: Evidence from the RCEP countries," International Review of Economics & Finance, Elsevier, vol. 83(C), pages 717-735.

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