Local Shocks or Global Forces? Exploring the dynamic interplay of Sovereign Credit Default Swaps in Emerging Markets.

Abstract

This study explores how emerging economies navigate challenges posed by domestic shocks and global pressures in global financial crises across market conditions. Understanding the dynamic interplay of country-specific and global forces affecting sovereign CDS has become increasingly important. The study sample was extracted from the Refinitiv Eikon database from the period of 2008 to 2023 for the BRIC which represents emerging economies. This study employs GMM and Panel Quantile regression for bull, normal and bear market conditions analysis. The study examined GMM results that most of the determinants narrow the Sovereign CDS spreads whereas VIX and Economic Policy Uncertainty Index widen the spread in our selected markets. Moreover, Panel Quantile regression results explored that variables significantly influence SCDS across market conditions except VIX significantly influences SCDS only in bullish market. However, stock exchange index has no significant influence on SCDS across market conditions. In addition, most of the variables played substantial roles in global financial crises except the stock exchange index in different market conditions. This study uncovers significant insights for policymakers to understand the convergence of local and global pressures which shape the landscape of SCDS premiums, and guide investors, economists and policymakers in prioritizing macroeconomic stability to effectively manage perceived sovereign risk.

keyword- Shocks or Global Forces, dynamic interplay of Sovereign Credit Default Swaps and  Emerging Markets.