Emerging Markets Sovereign CDS Spreads During Covid-19: Economics Versus Epidemiology News

38 Pages Posted: 7 Oct 2020 Last revised: 29 Mar 2021

See all articles by Timo Daehler

Timo Daehler

University of Southern California

Joshua Aizenman

University of Southern California - Department of Economics; National Bureau of Economic Research (NBER)

Yothin Jinjarak

Victoria University of Wellington - School of Economics & Finance

Date Written: October 2020

Abstract

Can bad news about COVID-19 induce negative expectations on sovereign credit risks? We investigate the factors driving credit default swap (CDS) spreads of emerging market sovereigns around the outbreak of COVID-19. Using 2014-2019 data, we estimate a two-factor model of global and regional risks and then extrapolate the model-implied spreads for the period July 2019–June 2020. Intriguingly, the model initially predicts the realized spreads well but loses predictive accuracy during the COVID-19 pandemic. Fiscal space and oil-revenue dependence primarily drive the differences between the realized and predicted sovereign spreads. Our augmented-factor model indicates that the cumulative COVID-19 mortality rate growth is positively associated with the CDS spreads. The evidence suggests that the epidemiological deterioration can lower confidence in the sovereign credit markets due to the prospects of prolonged lockdowns and a slower GDP growth recovery. Our results also hold for a single regression of daily spread changes during 2014-2020.

Suggested Citation

Daehler, Timo and Aizenman, Joshua and Jinjarak, Yothin, Emerging Markets Sovereign CDS Spreads During Covid-19: Economics Versus Epidemiology News (October 2020). NBER Working Paper No. w27903, Available at SSRN: https://ssrn.com/abstract=3705114

Timo Daehler (Contact Author)

University of Southern California

2250 Alcazar Street
Los Angeles, CA 90089
United States

Joshua Aizenman

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yothin Jinjarak

Victoria University of Wellington - School of Economics & Finance ( email )

P.O. Box 600
Wellington 6001
New Zealand

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
53
Abstract Views
244
rank
448,249
PlumX Metrics