The Role of Country-Specific Fundamentals in Sovereign CDS Spreads: Eastern European Experiences

29 Pages Posted: 23 Feb 2015 Last revised: 12 Jun 2016

Date Written: May 12, 2016

Abstract

We investigate the determinants of sovereign CDS spreads on a sample of Eastern European data. A dynamic hierarchical factor model is used to aggregate information in indicators of economic fundamentals. CDS spreads are regressed on forecasts of factors. We find that domestic fundamentals explain more of CDS spread variance than global factors, largely due to their ability to explain differences in sovereign risk across countries. The effects on CDS spreads are found to be time-varying. In terms of economic significance, the factor of institutional-political strength stands out. We apply the model to study CDS spreads of Poland, Russia and Turkey.

Keywords: sovereign CDS spreads, country-specific fundamentals, dynamic hierarchical factor model, Eastern Europe

JEL Classification: C3, E44, E60, G12, H63

Suggested Citation

Kocsis, Zalan and Monostori, Zoltan, The Role of Country-Specific Fundamentals in Sovereign CDS Spreads: Eastern European Experiences (May 12, 2016). Emerging Markets Review, Vol. 27, 2016, Available at SSRN: https://ssrn.com/abstract=2567798 or http://dx.doi.org/10.2139/ssrn.2567798

Zalan Kocsis (Contact Author)

Magyar Nemzeti Bank ( email )

Szabadsag ter 8-9
Budapest, H-1850
Hungary

Zoltan Monostori

Morgan Stanley ( email )

Hungary

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