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Modelling CDS Volatility at Different Tenures: An Application for Latin-American Countries

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  • Fredy Gamboa-Estrada
  • José Vicente Romero

Abstract

Assessing the dynamics of risk premium measures and its relationship with macroeconomic fundamentals is important for both macroeconomic policymakers and market practitioners. This paper analyzes the main determinants of CDS in Latin-America at different tenures, focusing on their volatility. Using a component GARCH model, we decompose volatility between permanent and transitory components. We find that the permanent component of CDS volatility in all tenors was higher and more persistent in the global financial crisis than during the recent COVID-19 shock. **** RESUMEN: Evaluar la dinámica de las medidas de prima de riesgo y su relación con los fundamentales macroeconómicos es importante tanto para quienes implementan las políticas macroeconómicas como para los participantes del mercado. En este documento se analizan los principales determinantes de los CDS para economías de Latinoamérica a diferentes plazos, enfocándose en su volatilidad. Empleando un modelo GARCH por componentes, se realiza una descomposición de la volatilidad de los CDS a diferentes plazos entre un componente permanente y transitorio. En los resultados se encuentra que el componente permanente de la volatilidad de los CDS en todos los plazos fue mayor y más persistente durante la crisis financiera global que durante el episodio más reciente relacionado con el choque del COVID-19.

Suggested Citation

  • Fredy Gamboa-Estrada & José Vicente Romero, 2022. "Modelling CDS Volatility at Different Tenures: An Application for Latin-American Countries," Borradores de Economia 1199, Banco de la Republica de Colombia.
    • Handle: RePEc:bdr:borrec:1199
    DOI: 10.32468/be.1199
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    References listed on IDEAS

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    6. Calice, Giovanni & Mio, RongHui & Štěrba, Filip & Vašíček, Bořek, 2015. "Short-term determinants of the idiosyncratic sovereign risk premium: A regime-dependent analysis for European credit default swaps," Journal of Empirical Finance, Elsevier, vol. 33(C), pages 174-189.
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    1. Beauregard, Remy & Christensen, Jens H.E. & Fischer, Eric & Zhu, Simon, 2024. "Inflation expectations and risk premia in emerging bond markets: Evidence from Mexico," Journal of International Economics, Elsevier, vol. 151(C).

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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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