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Macroeconomic uncertainty and credit default swap spreads

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  • Christopher Baum
  • Chi Wan

Abstract

This article empirically investigates the impact of macroeconomic uncertainty on the spreads of individual firms' Credit Default Swaps (CDSs). While the existing literature acknowledges the importance of the levels of macroeconomic factors in determining CDS spreads, we find that the second moments of these factors-macroeconomic uncertainty-have significant explanatory power over and above that of traditional macroeconomic factors such as the risk-free rate and the Treasury term spread.

Suggested Citation

  • Christopher Baum & Chi Wan, 2010. "Macroeconomic uncertainty and credit default swap spreads," Applied Financial Economics, Taylor & Francis Journals, vol. 20(15), pages 1163-1171.
    • Handle: RePEc:taf:apfiec:v:20:y:2010:i:15:p:1163-1171
    DOI: 10.1080/09603101003781455
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    Cited by:

    1. Aktham Maghyereh & Hussein Abdoh, 2024. "Oil price uncertainly and sovereign credit risk in GCC countries: fresh evidence," International Economics and Economic Policy, Springer, vol. 21(2), pages 457-482, May.
    2. Burkhard Raunig, 2018. "Economic Policy Uncertainty and the Volatility of Sovereign CDS Spreads," Working Papers 219, Oesterreichische Nationalbank (Austrian Central Bank).
    3. Bilal Kargi, 2014. "Credit Default Swap (Cds) Spreads: The Analysis Of Time Series For The Interaction With The Interest Rates And The Growth In Turkish Economy," Montenegrin Journal of Economics, Economic Laboratory for Transition Research (ELIT), vol. 10(1), pages 59-66.
    4. Wu, Ji & Yao, Yao & Chen, Minghua & Jeon, Bang Nam, 2020. "Economic uncertainty and bank risk: Evidence from emerging economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 68(C).
    5. Van Robays, Ine, 2012. "Macroeconomic uncertainty and the impact of oil shocks," Working Paper Series 1479, European Central Bank.
    6. Apergis, Nicholas & Danuletiu, Dan & Xu, Bing, 2022. "CDS spreads and COVID-19 pandemic," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 76(C).
    7. Naifar, Nader & Shahzad, Syed Jawad Hussain & Hammoudeh, Shawkat, 2020. "Dynamic nonlinear impacts of oil price returns and financial uncertainties on credit risks of oil-exporting countries," Energy Economics, Elsevier, vol. 88(C).
    8. Kim, Suk-Joong & Salem, Leith & Wu, Eliza, 2015. "The role of macroeconomic news in sovereign CDS markets: Domestic and spillover news effects from the U.S., the Eurozone and China," Journal of Financial Stability, Elsevier, vol. 18(C), pages 208-224.
    9. Ballestra, Luca Vincenzo & Pacelli, Graziella, 2014. "Valuing risky debt: A new model combining structural information with the reduced-form approach," Insurance: Mathematics and Economics, Elsevier, vol. 55(C), pages 261-271.
    10. Nusrat Jahan, 2022. "Macroeconomic Determinants of Corporate Credit Spreads: Evidence from Canada," Carleton Economic Papers 22-07, Carleton University, Department of Economics.
    11. Gamze Ozturk Danisman & Amine Tarazi, 2021. "Economic policy uncertainty and bank stability," Working Papers hal-03259298, HAL.
    12. Nader Naifar & Syed Jawad Hussain Shahzad & Shawkat Hammoudeh, 2017. "The Impact of Major Oil, Financial and Uncertainty Factors on Sovereign CDS Spreads: Evidence from GCC, Other Oil-Exporting Countries and Regional Markets," Working Papers 1129, Economic Research Forum, revised 08 2017.
    13. Alena Audzeyeva & Xu Wang, 2023. "Fundamentals, real-time uncertainty and CDS index spreads," Review of Quantitative Finance and Accounting, Springer, vol. 61(1), pages 1-33, July.
    14. Cottrell, Simon & Yu, Xiao & Delpachitra, Sarath & Ma, Yihong, 2021. "What determines wholesale funding costs of the global systemically important banks?," Journal of Banking & Finance, Elsevier, vol. 132(C).
    15. Bilgin, Mehmet Huseyin & Danisman, Gamze Ozturk & Demir, Ender & Tarazi, Amine, 2021. "Economic uncertainty and bank stability: Conventional vs. Islamic banking," Journal of Financial Stability, Elsevier, vol. 56(C).
    16. Nader Naifar, 2020. "What Explains the Sovereign Credit Default Swap Spreads Changes in the GCC Region?," JRFM, MDPI, vol. 13(10), pages 1-22, October.
    17. Dang, Van Dan & Nguyen, Hoang Chung, 2022. "Bank profitability under uncertainty," The Quarterly Review of Economics and Finance, Elsevier, vol. 83(C), pages 119-134.
    18. Wu, Ji & Yao, Yao & Chen, Minghua & Jeon, Bang Nam, 2021. "Does economic uncertainty affect the soundness of banks? Evidence from emerging Asian economies," Journal of Asian Economics, Elsevier, vol. 77(C).
    19. Van Dan Dang & Hoang Chung Nguyen, 2022. "Credit Risk Amid Banking Uncertainty In Vietnam," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 25(1), pages 73-96, June.
    20. Samaniego-Medina, Reyes & Trujillo-Ponce, Antonio & Parrado-Martínez, Purificación & di Pietro, Filippo, 2016. "Determinants of bank CDS spreads in Europe," Journal of Economics and Business, Elsevier, vol. 86(C), pages 1-15.
    21. Xiaoqing Fu & Matthew C. Li & Philip Molyneux, 2021. "Credit default swap spreads: market conditions, firm performance, and the impact of the 2007–2009 financial crisis," Empirical Economics, Springer, vol. 60(5), pages 2203-2225, May.
    22. Asia Aman, 2019. "Are CDS Spreads Sensitive to the Term Structure of the Yield Curve? A Sector-Wise Analysis under Various Market Conditions," JRFM, MDPI, vol. 12(4), pages 1-13, September.
    23. Jatin Malhotra & Angelo Corelli, 2018. "The Determinants of CDS Spreads in Multiple Industry Sectors: A Comparison between the US and Europe," Risks, MDPI, vol. 6(3), pages 1-16, August.
    24. Hasan Murat Ertugrul & Huseyin Ozturk, 2013. "The Drivers of Credit Default Swap Prices: Evidence from Selected Emerging Market Countries," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 49(S5), pages 228-249, November.
    25. Pereira, John & Sorwar, Ghulam & Nurullah, Mohamed, 2018. "What drives corporate CDS spreads? A comparison across US, UK and EU firms," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 56(C), pages 188-200.

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    More about this item

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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