Do Macro-Economic Fundamentals Price Sovereign CDS Spreads Of Emerging Economies?

Date Added: Jun 2010
Format: PDF

This paper studies the extent to which macro-economic variables govern the dynamics of emerging markets sovereign CDS spreads. The author proposes a structural model of sovereign credit risk based on observed exports, imports and international reserves. Using these macro fundamentals, the author defines a country's ability to pay as the maximum amount of foreign currency available for repayment of non-domestic debt. The joint dynamics of the ability to pay and a sovereign's outstanding external debt determine the level of country default risk and thus the CDS spreads. The author implements the model for a sample of 6 emerging economies for a period covering the recent financial crisis.