The Impact of Stock Markets, Interest Rates, and Exchange Rates on Credit Default Swap Premiums: Evidence from Advanced and Emerging Economies

Abstract

AbstractThis study aim to how bond yields, yield curves, exchange rates, stock indices, and market volatility impact on Credit Default Swap (CDS) spreads. This study tries to reach a larger sample size by using weekly data from 33 countries account for about 77% of the world’s GDP. CDS determinants are identified by country development level and the sample is divided into developed and emerging economies. The study also covers the effects of global and regional risk factors such as the European debt crisis, the US debt ceiling crisis, the oil shock, the US-China trade war, COVID-19, Russia’s invasion of Ukraine, and the Israel-Hamas conflict. It uses weekly data from 33 countries (both advanced and emerging markets) covering the period from January 1, 2010, to August 30, 2024. The authors use to Pesaran’s (2006) Common Correlated Effects Mean Group estimator and Eberhardt and Bond’s (2009) Augmented Mean Group (AMG) method. Results show that bond yields have a positive effect on CDS spreads in both advanced and emerging economies. Stock market performance negatively affects CDS spreads, while exchange rates negatively impact CDS spreads in advanced economies but positively in emerging markets.