Does Economic Policy Uncertainty Drive CDS Spreads?

Date
2015-12-01
Authors
Lambe, Brendan
Wisiniewski, Tomasz
Journal Title
Journal ISSN
ISSN
Volume Title
Publisher
Elsevier
Peer reviewed
Yes
Abstract
This study analyzes the dynamic interactions between changes in economic policy uncertainty and the fluctuations in the cost of credit protection. We find that the differenced iTraxx and CDX indices are Granger-caused by variations in the political environment. Within a vector autoregressive framework, impulse response functions show a significant reaction of the CDS spreads to shocks in the policy risk. Implied in these findings is the possibility that country-level risk can permeate to the corporations. Furthermore, financial institutions and traders should closely monitor political developments in order to better predict the CDS premia.
Description
Keywords
Credit default swaps, Credit protection, Economic policy uncertainty
Citation
Lambe, B.J. and Wisinewski, T.P. (2015) Does Economic Policy Uncertainty Drive CDS Spreads? International Review of Financial Analysis, 42, pp. 447-458
Research Institute
Finance and Banking Research Group (FiBRe)