The factors affecting the sovereign credit default swap premiums in emerging markets

From the beginning of 2000s to the present, the market of sovereign credit derivatives has grown rapidly and CDS, one of the most important credit derivatives instrument, has become a key indicator that used widely in assessing credit risk of a country as an alternative to credit ratings. The aim of this thesis is to investigate the impact of the macroeconomic and financial factors on the dynamics of sovereign CDS in following period 2004-2017 for 21 Emerging countries. In order to determine the factors that affect the sovereign CDS premiums panel data analysis method is used. The results showed that interest rate, GDP per capita, foreign exchanges, global risk factors, and inflation have a positive and significant effect on sovereign CDS premium. However, stock markets and credit ratings have a negative and significant impact on sovereign CDS premium. The major three factors that impact sovereign CDS premiums are interest rate, GDP per capita, and stock markets respectively. Unexpectedly, it is found that goverment debt, unemployment rate, central banks reserves, budget balance, current account, and credit amount have not significant explanatory power over the sovereign CDS premiums. Despite this, the overall model captures a significant part of the empirical variation in sovereign CDS spreads. Findings of this study is important for researchers, policy makers and market participants on forecasting and evaluating the country risk premium.