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Does Economic Policy Uncertainty Drive CDS Spreads?

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journal contribution
posted on 22.09.2015, 10:43 by Tomasz Piotr Wisniewski, Brendan John Lambe
This study analyzes the dynamic interactions between changes in economic policy uncertainty and the fluctuations in cost of credit protection. We find that the differenced iTraxx and CDX indices are Granger-caused by variations in the political environment. Within a Vector Autoregressive framework, impulse response functions show a significant reaction of the CDS spreads to shocks in the policy risk. Implied in these findings is the possibility that country-level risk can permeate to the corporations. Furthermore, financial institutions and traders should closely monitor political developments in order to better predict the CDS premia.

History

Citation

International Review of Financial Analysis, 2015, 42, pp. 447–458

Author affiliation

/Organisation/COLLEGE OF SOCIAL SCIENCE/School of Management

Version

AM (Accepted Manuscript)

Published in

International Review of Financial Analysis

Publisher

Elsevier

issn

1057-5219

Acceptance date

06/01/2015

Copyright date

2015

Available date

09/04/2017

Publisher version

http://www.sciencedirect.com/science/article/pii/S1057521915001568

Notes

The file associated with this record is under embargo until 18 months after publication, in accordance with the publisher's self-archiving policy. The full text may be available through the publisher links provided above.

Language

en