Do CDS spreads and inflation move together? The experience of the fragile five countries and the BRICS-T

Abstract

International investors wish to measure the sovereign risk premiums of the countries they want to invest in. Credit Default Swap Spread (CDS), which also shows the credit risks, is one of the important proxies that measure the country risk. Increased CDS spreads increase the cost of borrowing of countries and therefore the factors affecting the CDS spreads should be determined correctly. From this point of view, this study investigates the factors that have impacts on CDS spread ratios of BRICS-T and Fragile Five countries. According to panel regression results, exchange rate, inflation rate, unemployment rate and VIX positively affect CDS spreads. However, Industry Production Index, GDP growth and S&P 500 Index level negatively affect CDS spreads. These results are accurate both for BRICS-T and Fragile Five countries. We also find that Industry production index, GDP growth rate and unemployment rate are the significant determinants of inflation for both BRICS-T countries and Fragile Five countries.