Anatomy of a Sovereign Debt Crisis: Machine Learning, Real-time Macro Fundamentals, and CDS Spreads
Journal of Financial Econometrics
74 Pages Posted: 15 Apr 2020 Last revised: 21 Jun 2022
Date Written: June 21, 2020
We employ a LASSO-based extension of the Fama-MacBeth procedure to characterize the time-varying dependence of sovereign Credit Default Swap (CDS) spreads on macro indicators during the samples 2009-2013 and 2013-2020. While CDS spreads are mainly reflective of fundamentals, this relationship varies substantially over time, leading to price variation that appears unrelated to fundamentals. The estimated LASSO coefficients are used to endogenously identify macro-sensitivity "regimes" of variation, consistently with a multiple-equilibrium view of the sovereign debt markets.
Keywords: macroeconomic fundamentals, CDS spreads, LASSO
JEL Classification: G12
Suggested Citation: Suggested Citation