The Effect of Economic and Political Uncertainty on Sovereign CDS Spreads
37 Pages Posted: 24 Jun 2019 Last revised: 24 Apr 2020
Date Written: June 19, 2019
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: Suggested Citation