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Regime-switching determinants of emerging markets sovereign credit risk swaps spread

Author

Listed:
  • Ma, Jason Z.
  • Deng, Xiang
  • Ho, Kung-Cheng
  • Tsai, Sang-Bing
Abstract
Using the Markov regime switching approach, the authors investigate the dependency of short term sovereign credit default swap (SCDS) spread changes on a nation's country-specific fundamental factors, local, regional and macroeconomic global factors. They find that the significance of the determinants of SCDS spread changes differ across the two states of our regime-switching model. Specifically, in the "good" state the weekly SCDS spread changes are mainly determined by local, regional and fundamental factors; whereas global variables have stronger influence in the "bad" regime. In particular, US market returns play a dominant role in influencing the SCDS spread change in the "bad" state suggesting loss aversion and flight to quality behavior of investors. The authors then examine the cross-sectional differences of the above regime switching effect based on country-specific characters and find that the regime switching effect is associated with a nation's country-specific characters such as openness, economic size, etc.

Suggested Citation

  • Ma, Jason Z. & Deng, Xiang & Ho, Kung-Cheng & Tsai, Sang-Bing, 2018. "Regime-switching determinants of emerging markets sovereign credit risk swaps spread," Economics Discussion Papers 2018-52, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwedp:201852
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    References listed on IDEAS

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    2. Giacomo Bulfone & Roberto Casarin & Francesco Ravazzolo, 2021. "Corporate CDS spreads from the Eurozone crisis to COVID-19 pandemic: A Bayesian Markov switching model," Working Paper series 21-09, Rimini Centre for Economic Analysis.
    3. Oscar V. De la Torre-Torres & Evaristo Galeana-Figueroa & José Álvarez-García, 2020. "Markov-Switching Stochastic Processes in an Active Trading Algorithm in the Main Latin-American Stock Markets," Mathematics, MDPI, vol. 8(6), pages 1-23, June.
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    5. Oscar V. De la Torre-Torres & Evaristo Galeana-Figueroa & María de la Cruz Del Río-Rama & José Álvarez-García, 2022. "Using Markov-Switching Models in US Stocks Optimal Portfolio Selection in a Black–Litterman Context (Part 1)," Mathematics, MDPI, vol. 10(8), pages 1-28, April.
    6. Oscar V. De la Torre-Torres & Dora Aguilasocho-Montoya & María de la Cruz del Río-Rama, 2020. "A Two-Regime Markov-Switching GARCH Active Trading Algorithm for Coffee, Cocoa, and Sugar Futures," Mathematics, MDPI, vol. 8(6), pages 1-19, June.
    7. Maria Czech, 2022. "The Impact of Covid-19 Dynamics on SCDS Spreads in Selected CEE Countries," European Research Studies Journal, European Research Studies Journal, vol. 0(1), pages 254-271.
    8. Baltodano López Ovielt & Bulfone Giacomo & Casarin Roberto & Ravazzolo Francesco, 2024. "Modeling Corporate CDS Spreads Using Markov Switching Regressions," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 28(2), pages 271-292, April.
    9. Cayirli, Omer & Aktas, Huseyin & Kayalidere, Koray, 2022. "A closer look into the behavior of emerging market sovereign spreads: State-dependent and asymmetric behaviors," International Review of Economics & Finance, Elsevier, vol. 77(C), pages 522-548.

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    More about this item

    Keywords

    sovereign credit default swap (SCDS); emerging market; Markov regime switching; credit risk; economics;
    All these keywords.

    JEL classification:

    • A10 - General Economics and Teaching - - General Economics - - - General
    • F30 - International Economics - - International Finance - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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