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Measuring Sovereign Risk: Are CDS Spreads Better than Sovereign Credit Ratings?
Author(s) -
Rodríguez Iván M.,
Dandapani Krishnan,
Lawrence Edward R.
Publication year - 2018
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/fima.12223
Subject(s) - sovereign credit , credit default swap , predictability , credit rating , credit risk , sovereignty , business , monetary economics , economics , financial system , actuarial science , statistics , mathematics , political science , politics , law
Abstract Using data for 54 countries over a 12‐year period, we find that the variation in average sovereign ratings in a given year can be explained by average credit default swap (CDS) spreads over the previous three years. In a horse race between CDS spreads and sovereign ratings, we find that CDS spread changes can predict sovereign events, while rating changes cannot. The predictability of CDS spreads is greater when there is disagreement between Moody's and the S&P for a country's rating.