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
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
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