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Determinants and price discovery of China sovereign credit default swaps

Author

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  • Eyssell, Thomas
  • Fung, Hung-Gay
  • Zhang, Gaiyan

Abstract

We study the determinants of levels and changes of sovereign credit default swap (CDS) spreads in China from January 2001 to December 2010. Both country-specific factors (such as the China stock market index and the real interest rate) and global factors (the U.S. S&P 500 stock option volatilities and default spreads, and the non-North America global stock market factor) have significant explanatory power on CDS spreads in terms of both levels and changes. China's domestic economic factors were more relevant in explaining the CDS spread levels and changes in the earlier years, while the impact of global factors has become increasingly important in recent years, particularly during the global crisis. Within a vector autoregressive (VAR) model controlling for exogenous variables, we find that China sovereign CDS spread changes lead stock returns.

Suggested Citation

  • Eyssell, Thomas & Fung, Hung-Gay & Zhang, Gaiyan, 2013. "Determinants and price discovery of China sovereign credit default swaps," China Economic Review, Elsevier, vol. 24(C), pages 1-15.
    • Handle: RePEc:eee:chieco:v:24:y:2013:i:c:p:1-15
    DOI: 10.1016/j.chieco.2012.09.003
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    More about this item

    Keywords

    China sovereign credit default swaps; Determinants of levels and changes; Lead–lag relationship;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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