Global Perspective or Local Knowledge: The Macro-Information in the Sovereign CDS Market
57 Pages Posted: 13 Feb 2017 Last revised: 29 Apr 2019
Date Written: April 26, 2019
This paper shows that sovereign CDS spreads can predict future stock index returns, sovereign bond yields, as well as real macroeconomic variables such as GDP and PMI. The predictive power comes almost entirely from the global, rather than country-specific, component of sovereign CDS spreads. This is consistent with the interpretation that the information advantage of sovereign CDS investors is derived from their global perspective rather than their local knowledge about individual countries. Stock and sovereign bond market indices gradually “catch up” with sovereign CDS spreads, mostly during the days surrounding credit rating or outlook changes, and especially for downgrades.
Keywords: Macro Information, Sovereign CDS, Predictability, Limits to Arbitrage
JEL Classification: G12
Suggested Citation: Suggested Citation