The COVID-19 Pandemic and Sovereign Credit Risk

China Finance Review International, Forthcoming

30 Pages Posted: 22 Jan 2021 Last revised: 29 Apr 2021

See all articles by Wei-Fong Pan

Wei-Fong Pan

Department of Economics, University of Reading

Xinjie Wang

Southern University of Science and Technology

Ge Wu

University of Richmond

Weike Xu

Clemson University - Department of Finance

Date Written: January 20, 2021

Abstract

This study examines the effects of the COVID-19 pandemic on sovereign CDS spreads using a large sample of countries. We show how sovereign CDS spreads have widened significantly in response to the COVID-19 pandemic. Based on the most conservative estimate, a 1% increase in COVID-19 infections leads to a 0.17% increase in sovereign CDS spreads. Furthermore, this effect is stronger for developing countries and countries with worse healthcare systems. Government policies partially offset the impact of the COVID-19 pandemic, although these same policies also lead to widening sovereign CDS spreads. Sovereign CDS spreads narrow dramatically several months after the outbreak of the COVID-19 pandemic. Overall, our results suggest that the ongoing COVID-19 pandemic has been a massive shock to the global financial stability.

Suggested Citation

Pan, Wei-Fong and Wang, Xinjie and Wu, Ge and Xu, Weike, The COVID-19 Pandemic and Sovereign Credit Risk (January 20, 2021). China Finance Review International, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3769644 or http://dx.doi.org/10.2139/ssrn.3769644

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

Ge Wu

University of Richmond ( email )

102 UR Drive
Richmond, VA 23173
United States

Weike Xu

Clemson University - Department of Finance ( email )

425 Sirrine Hall
Clemson, SC 29634
United States

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