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The term structure of CDS spreads and sovereign credit risk

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  • Augustin, Patrick

Abstract

The shape of the term structure of credit default swap spreads is an informative signal about the importance of global and domestic risk factors to the time variation of sovereign credit spreads. Exploiting cross-country heterogeneity among 44 countries, I document that the importance of global and country-specific risk in explaining sovereign credit risk varies with the sign of the slope of the term structure and the duration of its inversion. A model is used to show that global uncertainty shocks determine spread changes when the slope is positive, and that domestic shocks are more important when the slope is negative.

Suggested Citation

  • Augustin, Patrick, 2018. "The term structure of CDS spreads and sovereign credit risk," Journal of Monetary Economics, Elsevier, vol. 96(C), pages 53-76.
    • Handle: RePEc:eee:moneco:v:96:y:2018:i:c:p:53-76
    DOI: 10.1016/j.jmoneco.2018.04.001
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    More about this item

    Keywords

    Credit default swaps; Default risk; Sovereign debt; Term structure;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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