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Does Economic Policy Uncertainty Drive CDS Spreads?

44 Pages Posted: 29 Oct 2014 Last revised: 9 May 2015

Tomasz Piotr Wisniewski

University of Leicester

Brendan John Lambe

University of Leicester

Date Written: October 28, 2014

Abstract

This study analyzes the dynamic interactions between changes in economic policy uncertainty and the fluctuations in cost of credit protection. We find that the differenced iTraxx and CDX indices are Granger-caused by variations in the political environment. Within a Vector Autoregressive framework, impulse response functions show a significant reaction of the CDS spreads to shocks in the policy risk. Implied in these findings is the possibility that country-level risk can permeate to the corporations. Furthermore, financial institutions and traders should closely monitor political developments in order to better predict the CDS premia.

Keywords: Credit Default Swaps, Credit Protection, Economic Policy Uncertainty

JEL Classification: G12, G13, G22, P16

Suggested Citation

Wisniewski, Tomasz Piotr and Lambe, Brendan John, Does Economic Policy Uncertainty Drive CDS Spreads? (October 28, 2014). Available at SSRN: https://ssrn.com/abstract=2515769 or http://dx.doi.org/10.2139/ssrn.2515769

Tomasz Piotr Wisniewski

University of Leicester ( email )

University Road
Leicester, LE1 7RH
United Kingdom

Brendan John Lambe (Contact Author)

University of Leicester ( email )

University Road
Leicester, LE1 7RH
United Kingdom
01162297420 (Phone)

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