Global Perspective or Local Knowledge: The Macro-Information in the Sovereign CDS Market

57 Pages Posted: 13 Feb 2017 Last revised: 29 Apr 2019

See all articles by Yaqing Xiao

Yaqing Xiao

Rutgers University

Hongjun Yan

DePaul University

Jinfan Zhang

International Monetary Fund

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

Xiao, Yaqing and Yan, Hongjun and Zhang, Jinfan, Global Perspective or Local Knowledge: The Macro-Information in the Sovereign CDS Market (April 26, 2019). Available at SSRN: or

Yaqing Xiao

Rutgers University ( email )

94 Rockafeller Road
New Brunswick, NJ 08901
United States

Hongjun Yan (Contact Author)

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604
United States


Jinfan Zhang

International Monetary Fund ( email )

700 19th St NW
Washington, DC 20431
United States

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