Measuring sovereign risk: Are CDS spreads better than sovereign credit ratings?
Document Type
Article
Publication Date
2019
Department/School
Accounting and Finance
Publication Title
Financial Management
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.
Link to Published Version
Recommended Citation
Rodríguez, I. M., Dandapani, K., & Lawrence, E. R. (2019). Measuring sovereign risk: Are CDS spreads better than sovereign credit ratings?: Measuring sovereign risk. Financial Management, 48(1), 229–256. https://doi.org/10.1111/fima.12223