The Term Structure of CDS Spreads and Sovereign Credit Risk

58 Pages Posted: 1 Nov 2014 Last revised: 22 Apr 2016

See all articles by Patrick Augustin

Patrick Augustin

McGill University, Desautels Faculty of Management

Date Written: April 21, 2016

Abstract

The shape of the term structure of credit default swap spreads is an informative signal about the relative importance of global and domestic risk factors to the time variation of sovereign credit spreads. Using a geographically dispersed panel of 44 countries, I show that the relative importance of global and country-specific risk in explaining sovereign credit risk varies with the sign of the slope of the term structure and the duration of its inversion. A model rationalizes how global shocks determine spread changes when the slope is positive, while a negative slope signals that domestic shocks are relatively more important.

Keywords: Credit Default Swaps, Default Risk, Sovereign Debt, Term Structure

JEL Classification: C1, E43, E44, G12, G15

Suggested Citation

Augustin, Patrick, The Term Structure of CDS Spreads and Sovereign Credit Risk (April 21, 2016). Available at SSRN: https://ssrn.com/abstract=2517018 or http://dx.doi.org/10.2139/ssrn.2517018

Patrick Augustin (Contact Author)

McGill University, Desautels Faculty of Management ( email )

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