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PRESENTATION ARCHIVES
  N°141  
Issue Q1 2015  
Fiscal austerity, growth prospects, and sovereign CDS spreads: The Eurozone and beyond  
Chunming Yuan
Tanu J. Pongsiri
 
This paper applies both conventional panel data models and a dynamic simultaneous equations model to analyze the impact of fiscal austerity and growth prospects along with other macro fundamentals on the pricing of sovereign credit default swaps (CDS) for a panel of 36 countries including the Eurozone. We find that austerity practice generally leads to an expectation of improved fiscal situations, which tends to help the CDS market grow more confidence in indebted sovereigns? ability to service their debt. The public debt to GDP ratio and projected future output growth also play an important role in determining the prices of sovereign debt insurance. Our analyses further show that the behavior of CDS spreads is considerably affected by common time trends over the sample period. Abstract

   
Credit default swap ; Fiscal austerity ; Growth prospects ; Dynamic simultaneous equations model ; Keywords
F34 ; G10 ; G15 ; H60 ; JEL classification
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