The Determinants of Sovereign Credit Default Swaps (CDS) Spread

The paper examines the determinants of sovereign CDS spreads for 19 different primary sovereigns from January 2009 to December 2018, using several macroeconomic variables. We apply a panel vector autoregressive (PVAR) model using a system-generalized method of moment (System-GMM) methodology, to analyse the relationship between the CDS spreads and its macroeconomic determinants. Our model combines both local factors, such as GDP growth rate, import, export, inflation rate, the balance of payment, and government external debt with global factors such as S&P 500 Index (SP500) returns, CBOE Market Volatility Index (VIX), and 10-year U.S. Treasury. We find that both local (such as inflation and government external debt), and global (e.g., VIX) determinants of sovereign CDS spreads are statistically significant through various periods for most maturities.