Relationship between Stock and the Sovereign CDS markets: A panel VAR based analysis

Abstract

This study explores the relationship between the Stock and the Sovereign Credit Default Swaps (SCDS) markets by using dataset of 36 countries.We apply Panel Vector Autoregressive (PVAR) model to gauge the impact of one market's shocks to the other. Our results decipher that changes in stock market returns explain the significant portion of the SCDS market spreads' changes. Furthermore, the magnitude of this explanation is linked with the volatility of the SCDS market. These analyses indicate that the firsthand information about the country's sovereign credit risk is contained in the respective stock market, and can be used by participants/investors to predict the SCDS market spreads.

How the macroeconomic conditions and the global risk factors affect sovereign CDS spreads? New Evidence from Turkey

“…There is also evidence that the stock market return is significantly related to CDS spread changes (Ngene, Hassan, and Alam, 2014;Tabak, Miranda, and Medeiros, 2016). By employing the Panel VAR methodology, Shear and Butt (2017) investigated the CDS market for 36 countries. They found that a significant portion of the CDS spread changes are explained by stock market return.…”