Does Monetary Policy Impact Sovereign Credit Risk Comovement?
51 Pages Posted: 14 May 2020 Last revised: 21 Dec 2021
Date Written: December 21, 2020
This paper shows that FED policy announcements are accompanied with a significant increase in international co-movement in the sovereign CDS market. The effect is strongest for emerg- ing markets, when the FED relaxes unconventional monetary policies, and for countries that are open to the trading of goods and flows, even with floating exchange rates. The announce- ments also affect closed economies whose currencies are pegged to the dollar. The evidence is consistent with recent theories of a global financial cycle and the pricing of a FED put. In contrast, ECB announcements hardly affect co-movement, even in the Eurozone.
Keywords: Sovereign credit risk, Monetary policy, Quantitative easing, Mundellian trilemma, Comovement
JEL Classification: E58, G12, G15
Suggested Citation: Suggested Citation