Emerging markets sovereign CDS spreads during COVID-19: Economics versus epidemiology news

Timo B. Daehler, Joshua Aizenman, Yothin Jinjarak

Research output: Contribution to journalArticlepeer-review

26 Scopus citations


Can bad news about COVID-19 induce negative expectations on sovereign credit risks? We investigate the factors driving credit default swap (CDS) spreads of emerging market sovereigns around the outbreak of COVID-19. Using 2014–2019 data, we estimate a two-factor model of global and regional risks and then extrapolate the model-implied spreads for the period July 2019–June 2020. Intriguingly, the model initially predicts the realized spreads well but loses predictive accuracy during the COVID-19 pandemic. Fiscal space and oil-revenue dependence primarily drive the differences between the realized and predicted sovereign spreads. Our augmented-factor model indicates that the cumulative COVID-19 mortality rate growth is positively associated with the CDS spreads. The evidence suggests that the epidemiological deterioration can lower confidence in the sovereign credit markets due to the prospects of prolonged lockdowns and a slower GDP growth recovery. Our results also hold for a single regression of daily spread changes during 2014–2020.

Original languageEnglish
Article number105504
JournalEconomic Modelling
StatePublished - 1 Jul 2021
Externally publishedYes


  • Emerging markets
  • Fiscal space
  • Oil shocks
  • Sovereign spreads

ASJC Scopus subject areas

  • Economics and Econometrics


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