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Time-frequency comovements between sovereign CDS and exchange rates: The role of sentiments

Author

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  • Liu, Chang
  • Sun, Xiaolei
  • Li, Jianping

Abstract

This study introduces various bivariate, multiple, and partial wavelet methods to explore the role of inclusive market sentiments in comovements between sovereign credit default swap (CDS) spreads and exchange rates from a time-frequency perspective. The empirical results show that the sovereign CDS spread and exchange rate nexus varies across countries and time-frequency domains. Further, the strong and positive comovements between sovereign CDS spreads and exchange rates are uncovered, concentered at medium- and long-term frequencies, especially in commodity-dependent countries. Among the various market sentiments, Volatility Index and Chicago Board Options Exchange Crude Oil Volatility are revealed as the most critical factors driving the comovements in commodity-dependent countries. The findings provide important recommendations for investors, regulatory authorities, and policymakers to understand the pivotal roles of market sentiments in inducing comovement between sovereign CDS spreads and exchange rates.

Suggested Citation

  • Liu, Chang & Sun, Xiaolei & Li, Jianping, 2023. "Time-frequency comovements between sovereign CDS and exchange rates: The role of sentiments," Global Finance Journal, Elsevier, vol. 56(C).
    • Handle: RePEc:eee:glofin:v:56:y:2023:i:c:s1044028322000771
    DOI: 10.1016/j.gfj.2022.100775
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    Cited by:

    1. He, Zhipeng & Zhang, Shuguang, 2024. "Risk contagion and diversification among sovereign CDS, stock, foreign exchange and commodity markets: Fresh evidence from G7 and BRICS countries," Finance Research Letters, Elsevier, vol. 62(PB).
    2. Reinhold Heinlein & Gabriella D. Legrenzi & Scott M. R. Mahadeo & Gabriella Deborah Legrenzi, 2024. "Exchange Rates and Sovereign Risk: A Nonlinear Approach Based on Local Gaussian Correlations," CESifo Working Paper Series 11019, CESifo.

    More about this item

    Keywords

    Sovereign CDS; Exchange rates; Market sentiments; Multiple and partial wavelets;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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