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Does economic policy uncertainty drive CDS spreads?

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  • Wisniewski, Tomasz Piotr
  • Lambe, Brendan John

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.

Suggested Citation

  • Wisniewski, Tomasz Piotr & Lambe, Brendan John, 2015. "Does economic policy uncertainty drive CDS spreads?," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 447-458.
    • Handle: RePEc:eee:finana:v:42:y:2015:i:c:p:447-458
    DOI: 10.1016/j.irfa.2015.09.009
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    More about this item

    Keywords

    Credit default swaps; Credit protection; Economic policy uncertainty;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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