The COVID-19 pandemic and sovereign credit risk
Purpose: The purpose of this study is to examine the effects of the coronavirus disease 2019 (COVID-19) pandemic on sovereign credit default swap (CDS) spreads using a large sample of countries. Design/methodology/approach: In this paper, the authors use a wide set of the sovereign CDS data of 78 countries. To measure the magnitude of the COVID-19 pandemic, the authors use the daily change of confirmed cases collected from Our World in Data. They use panel regressions to estimate the impact of the COVID-19 pandemic on sovereign credit risk. Findings: The authors show how sovereign CDS spreads have widened significantly in response to the COVID-19 pandemic. Based on the most conservative estimate, a 1% increase in COVID-19 infections leads to a 0.17% increase in sovereign CDS spreads. Furthermore, this effect is stronger for developing countries and countries with worse healthcare systems. Government policies partially offset the impact of the COVID-19 pandemic, although these same policies also lead to widening sovereign CDS spreads. Sovereign CDS spreads narrow dramatically several months after the outbreak of the COVID-19 pandemic. Overall, the results suggest that the ongoing COVID-19 pandemic has been a massive shock to the global financial stability. Originality/value: This paper provides new evidence that COVID-19 widens sovereign CDS spreads. The authors further show that this widening effect is felt most strongly in developing economies.
Year of publication: |
2021
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Authors: | Pan, Wei-Fong ; Wang, Xinjie ; Wu, Ge ; Xu, Weike |
Published in: |
China Finance Review International. - Emerald, ISSN 2044-1398, ZDB-ID 2589380-4. - Vol. 11.2021, 3 (20.05.), p. 287-301
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Publisher: |
Emerald |
Saved in:
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