Analysis of Credit Default Swaps Before, During, and After the COVID-19 Crisis
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In this dissertation, we studied the movement of CDS sector indices due to variables like commodity index and economic policy uncertainty index. We also tested the impact of structural model variables like equity and interest rates on CDS sector indices. The data sample spans seven years, from January 2017 to December 2023, including before, during, and after the COVID-19 period. Panel data regressions were analysed across 10 CDS sector indices sourced from Refinitiv.
The regressions of banking, non-bank financials, manufacturing, service, and sovereign CDS sector indices had positive and statistically significant EPU coefficients for the whole sample period. The commodity index (CRB index) had no statistically significant relationship with CDS sector indices except for the energy, power, and transportation sectors. Crude oil predicts banking, energy, and sovereign CDS sectors better than the CRB index. VIX coefficients were positive with considerable magnitude during COVID-19, and overall, VIX had a statistically significant positive association with CDS for the whole sample period. An exception is a negative association between VIX and CDS before and after COVID-19. VIX is a dominant uncertainty parameter during COVID-19.
At the same time, EPU is a more stable indicator of uncertainty’s impact on CDS since EPU positively impacts CDS for the entire sample period and sub-periods. The findings of our study confirm that CDS sector indices are negatively associated with the European equity index for the whole sample period and sub-periods. The impact of the US equity index on CDS sector indices differs for sub-periods; there is a positive relationship during the COVID-19 period. In contrast, there is a negative relationship before and after the COVID-19 period. The US 5-year treasury yield positively impacted CDS sector indices, an aberration from a theoretical understanding of structural models.
Our research substantiates previous research reports findings that an increase in EPU increases CDS spread, and we can investigate the relationship between EPU subindices and credit markets. We have used the oil ETF and CRB index to analyze commodity markets’ impact on CDS at the global level and all ten sectors of the economy, while in the past, researchers have analyzed specific sectors only.