Sovereign Credit Default Swaps, Sovereign Debt and Volatility Transmission Across Emerging Markets

Abstract

This paper uses daily sovereign credit default swap (CDS) prices to investigate how the credit risks of major Latin American reference entities are interlinked. Our empirical findings suggest that the underlying creditworthiness of nations is reflected in the direction of Granger causality and volatility transmission, and in the degree of volatility persistence. These findings are robust when derived from Latin American government bond credit spreads, yet some important differences emerge which indicate that the sovereign CDS market provides a better forum for diversification of credit risk exposure than does the bond market.

Keywords: Credit default swap, Credit Spread, Emerging market, International linkages, Price discovery

JEL Classification: C32, F34, G14, G15