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Determinants of Sovereign Credit Default Swap spreads for PIIGS - A macroeconomic approach

Brandorf, Christoffer LU and Holmberg, Johan LU (2010) NEKK01 20101
Department of Economics
Abstract
This study examines the effects of changes in macroeconomic variables on sovereign CDS spreads for the countries within the PIIGS block. We run regressions for the countries individually and with the inclusion of Germany as a benchmark. In addition to study the whole time period (2004Q1-2009Q3), we divided it into two sub-periods, the first being financially stable and the second being characterized by financial turmoil. A Ramsey RESET test shows that our first model is correctly specified during the second sub-period. We find the highest number of significant variables in this particular model. For the first sub-period we find our regressions to be insignificant.
Overall we find unemployment rates to be the most frequently significant... (More)
This study examines the effects of changes in macroeconomic variables on sovereign CDS spreads for the countries within the PIIGS block. We run regressions for the countries individually and with the inclusion of Germany as a benchmark. In addition to study the whole time period (2004Q1-2009Q3), we divided it into two sub-periods, the first being financially stable and the second being characterized by financial turmoil. A Ramsey RESET test shows that our first model is correctly specified during the second sub-period. We find the highest number of significant variables in this particular model. For the first sub-period we find our regressions to be insignificant.
Overall we find unemployment rates to be the most frequently significant determinant of the CDS spread. Our study shows that, in many cases, increasing government debt, independently as well as relative to Germany, contributes to wider CDS spreads. Furthermore we find varying results for GDP growth rate, while inflation is found to be the least significant variable in our study. (Less)
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author
Brandorf, Christoffer LU and Holmberg, Johan LU
supervisor
organization
course
NEKK01 20101
year
type
M2 - Bachelor Degree
subject
keywords
Macroeconomic variables, Credit Default Swap, Spread, PIIGS
language
English
id
1608010
date added to LUP
2010-05-31 11:19:16
date last changed
2010-05-31 11:19:16
@misc{1608010,
  abstract     = {This study examines the effects of changes in macroeconomic variables on sovereign CDS spreads for the countries within the PIIGS block. We run regressions for the countries individually and with the inclusion of Germany as a benchmark. In addition to study the whole time period (2004Q1-2009Q3), we divided it into two sub-periods, the first being financially stable and the second being characterized by financial turmoil. A Ramsey RESET test shows that our first model is correctly specified during the second sub-period. We find the highest number of significant variables in this particular model. For the first sub-period we find our regressions to be insignificant.
Overall we find unemployment rates to be the most frequently significant determinant of the CDS spread. Our study shows that, in many cases, increasing government debt, independently as well as relative to Germany, contributes to wider CDS spreads. Furthermore we find varying results for GDP growth rate, while inflation is found to be the least significant variable in our study.},
  author       = {Brandorf, Christoffer and Holmberg, Johan},
  keyword      = {Macroeconomic variables,Credit Default Swap,Spread,PIIGS},
  language     = {eng},
  note         = {Student Paper},
  title        = {Determinants of Sovereign Credit Default Swap spreads for PIIGS - A macroeconomic approach},
  year         = {2010},
}