Measuring Sovereign Risk: Are CDS Spreads Better than Sovereign Credit Ratings?

Rodríguez, Iván M.; Dandapani, Krishnan; Lawrence, Edward R.

doi:10.1111/fima.12223

Cited by 31 publications

(12 citation statements)

References 46 publications

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“…We control for various country-level and global factors that can influence a country's sovereign risk (Edwards, 1983;Rodríguez, Dandapani, & Lawrence, 2019) in the estimations. Data on country-level controls, namely, GDP per capita, inflation, current account balance, GDP growth, and total reserves (excluding gold) as a percentage of imports, are obtained primarily from the World Bank's World Development Indicators (WDI) database.…”

Section: Datamentioning

confidence: 99%

Central bank gold reserves and sovereign credit risk

2021

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Gold holdings with central banks are often considered to play a stabilizing role in times of crisis. This paper performs a cross-country panel data analysis of developed and developing countries to determine whether gold holdings of central banks contribute to sovereign creditworthiness. Our analysis confirms that an increase in central bank gold reserves reduces the credit default swap (CDS) spreads of a country. We also observe that during global crisis and country-specific crisis episodes, the role of central bank gold becomes even more important. In robustness tests, we account for potential endogeneity of central bank gold reserves using a Generalized Method of Moments (GMM) approach. The findings highlight the importance of gold in central bank reserves and indicate a positive role of gold in mitigating a nation's external vulnerabilities in an uncertain global economic environment.

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Section: Datamentioning

confidence: 99%

Central bank gold reserves and sovereign credit risk

2021

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“…A recent study prepared by Rodriguez et al (2019) asked if CDS spreads are better than sovereign credit ratings in measurement of credit risk. Based on findings CDS spread changes could predict sovereign crises that will come within next seven months, nonetheless ratings do not have such a predictive ability.…”

Section: Iliterature Reviewmentioning

confidence: 99%

“…This case stems from the smoothed ratings caused by policy adopted by rating agencies which delays rating changes. Rodriguez et al (2019) conclude that CDS spreads, which are available and less costly to collect compared to macroeconomic data, is useful to market participants.…”

Section: Introductionmentioning

confidence: 97%

“…Another reason is revenue bias which refers to issuers' tendency to make payments to rating agencies in an expectation to get a favorable rating. Rodriguez et al (2019) have mentioned from the fact that rating agencies adopt a through-thecycle approach. In other words they only take permanent changes affecting issuer's financial position into account in giving ratings.…”

Section: Introductionmentioning

confidence: 99%

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Interaction Between CDS Premiums and Stock Markets: Case of Turkey

Avci

2020

Ömer Halisdemir Üniversitesi İktisadi Ve İdari Bilimler Fakültesi Dergisi

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The relationship between CDS premiums and stock market is investigated in this study by using data of Turkey. Here CDS premiums, which constitute an alternative to sovereign credit ratings, are used as a measure of sovereign credit risk. At the end of examination a long term relationship is found based on traditional Johansen co integration test. C/S and C/T models of Gregory Hansen co integration test support this finding, whereas CC model does not. Toda Yamamoto causality test results indicate a unidirectional causality from BIST-100 return to CDS premiums.

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“…The sovereign credit risk represents the probability that a government might be unable to meet its debt obligations in the future. According to Rodríguez et al (2019), credit default swap (CDS) spreads measure sovereign credit risk better than sovereign credit rating. Using data for 54 countries over twelve years, they found that CDS spread changes can predict sovereign events while rating changes cannot.…”

Section: Introductionmentioning

confidence: 99%

What Explains the Sovereign Credit Default Swap Spreads Changes in the GCC Region?

Naifar

2020

JRFM

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This paper aimed to investigate the drivers of sovereign credit risk spreads changes in the case of four Gulf Cooperation Council (GCC) countries, namely Kingdom of Saudi Arabia (KSA), the United Arab Emirates (UAE), Qatar, and Bahrain. Specifically, we explained the changes in sovereign credit default swap (hereafter SCDS) spreads at different locations of the spread distributions by three categories of explanatory variables: global uncertainty factors, local financial variables, and global financial market variables. Using weekly data from 5 April 2013, to 17 January 2020, and the quantile regression model, empirical results indicate that the global factors outperform the local factors. The most significant variables for all SCDS spreads are the global financial uncertainty embedded in the Chicago Board Options Exchange (CBOE) volatility index (VIX) and the global conventional bond market uncertainty embedded in the Merrill Lynch Option Volatility Estimate (MOVE) index. Moreover, the MOVE index affects the various SCDS spreads only when the CDS markets are bullish. Interestingly, the SCDS spreads are not affected by the global economic policy and the gold market uncertainties. Additionally, a weak dependence is observed between oil prices and SCDS spreads. For the country-specific factors, stock market returns are the most significant variable and impact the SCDS spreads at different market circumstances.

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Measuring Sovereign Risk: Are CDS Spreads Better than Sovereign Credit Ratings?

Cited by 31 publications

References 46 publications

Central bank gold reserves and sovereign credit risk

Central bank gold reserves and sovereign credit risk

Interaction Between CDS Premiums and Stock Markets: Case of Turkey

What Explains the Sovereign Credit Default Swap Spreads Changes in the GCC Region?

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