The Effect of Economic and Political Uncertainty on Sovereign CDS Spreads

37 Pages Posted: 24 Jun 2019 Last revised: 24 Apr 2020

See all articles by Wei-Fong Pan

Wei-Fong Pan

Department of Economics, University of Reading

Xinjie Wang

Southern University of Science and Technology

Yaqing Xiao

Capital University of Economics and Business

Weike Xu

Clemson University - Department of Finance

Jinfan Zhang

Chinese University of Hong Kong (Shenzhen)

Date Written: June 19, 2019

Abstract

This study examines the effect of economic and political uncertainty on sovereign CDS spreads using a novel panel index of world uncertainty. We document that sovereign CDS spreads widen with uncertainty. A 1% increase in uncertainty leads to a 0.86% increase in sovereign CDS spreads. Furthermore, the effect of uncertainty on sovereign CDS spreads is stronger for developed countries, countries with investment-grade credit ratings, and during non-crisis periods. The banking sector is a potential channel through which uncertainty increases sovereign risk. Overall, our results suggest that economic and political uncertainty contributes to both local and global components of sovereign CDS spreads.

Keywords: Sovereign CDS Spread, Political Uncertainty, Economic Uncertainty

JEL Classification: E44, G10, G18

Suggested Citation

Pan, Wei-Fong and Wang, Xinjie and Xiao, Yaqing and Xu, Weike and Zhang, Jinfan, The Effect of Economic and Political Uncertainty on Sovereign CDS Spreads (June 19, 2019). Available at SSRN: https://ssrn.com/abstract=3406407 or http://dx.doi.org/10.2139/ssrn.3406407

Wei-Fong Pan

Department of Economics, University of Reading ( email )

Whiteknights
Reading, Berkshire RG6 6AH
United Kingdom

Xinjie Wang (Contact Author)

Southern University of Science and Technology ( email )

1088 Xueyuan Blvd
Xili, Nanshan District
Shenzhen, Guangdong 518055
China

Yaqing Xiao

Capital University of Economics and Business ( email )

Beijing
China

Weike Xu

Clemson University - Department of Finance ( email )

425 Sirrine Hall
Clemson, SC 29634
United States

Jinfan Zhang

Chinese University of Hong Kong (Shenzhen) ( email )

Shenzhen
China

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