Wide Spread Trade: Can terms of trade explain sovereign CDS spreads?

University essay from Handelshögskolan i Stockholm/Institutionen för finansiell ekonomi

Abstract: This study reexamines the recent finding that level and volatility of terms of trade has significant explanatory power on spreads of emerging market sovereigns. In contradiction to previous results, we find no significant effect of these variables after controlling for global factors. Specifically, we find that the U.S. default yield spread dominates our local and global variables in explanatory power. We use a recent sample of quarterly CDS spreads and conduct multiple regressions on a panel of data containing 15 countries, spanning from 2004 to 2010. All variables are regressed in the first difference form and various quality tests are performed to ensure that biases to the results are minimized. In addition, our results are robust to the inclusion of various lags and dummies as well as to tests of various subsections of our sample.

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