We analyze the sovereign CDS market for 57 countries, using a novel dataset comprising weekly positions and turnover data. We document that CDS markets - measured relative to a country's debt - are larger for smaller countries, countries with a rating just above the investment-grade cutoff, and countries with weaker creditor rights. Analyzing changes in credit risk, we find that rating changes matter but only for negative rating events (downgrades and negative outlooks). In particular, weeks with downgrades and negative outlooks are associated with a significantly higher turnover in the sovereign CDS market - even after controlling for changes in sovereign CDS spreads. We conclude that agencies' ratings are a major determinant of the size of the sovereign credit default swap market.

Credit Default Swaps: A Survey is the most comprehensive review of all major research domains involving credit default swaps (CDS). CDS have been growing in importance in the global financial markets. However, their role has been hotly debated, in industry and academia, particularly since the credit crisis of 2007-2009. The authors review the extant literature on CDS that has accumulated over the past two decades and divide the survey into seven topics after providing a broad overview in the introduction. The second section traces the historical development of CDS markets and provides an introduction to CDS contract definitions and conventions. The third section discusses the pricing of CDS, from the perspective of no-arbitrage principles, structural, and reduced-form credit risk models. It also summarizes the literature on the determinants of CDS spreads, with a focus on the role of fundamental credit risk factors, liquidity and counterparty risk. The fourth section discusses how the development of the CDS market has affected the characteristics of the bond and equity markets, with an emphasis on market efficiency, price discovery, information flow, and liquidity. Attention is also paid to the CDS-bond basis, the wedge between the pricing of the CDS and its reference bond, and the mispricing between the CDS and the equity market. The fifth section examines the effect of CDS trading on firms' credit and bankruptcy risk, and how it affects corporate financial policy, including bond issuance, capital structure, liquidity management, and corporate governance. The sixth section analyzes how CDS impact the economic incentives of financial intermediaries. The seventh section reviews the growing literature on sovereign CDS and highlights the major differences between the sovereign and corporate CDS markets. The eighth section discusses CDS indices, especially the role of synthetic CDS index products backed by residential mortgage-backed securities during the financial crisis. The authors close with our suggestions for promising future research directions on CDS contracts and markets.

This thesis analyses the relationship between the increasingly important sovereign CDS spreads and exchange rates, from a macroeconomic perspective. It attempts to address an existing gap in the empirical literature, which to date has paid limited attention to the role of exchange rates in influencing sovereign CDS spreads, and vice versa. In exploring the relationship between sovereign CDS markets and foreign exchange markets, I find relatively strong evidence of a causal relationship between these two variables. In a longer-term cointegrating relationship, I find that sovereign CDS spreads have different impacts (positive or negative) on exchange rates depending on the structural characteristics of the domestic export sectors of the countries studied. Turning to the second moment of exchange rates and sovereign CDS spreads, I examine the relationship between the volatility of sovereign CDS spreads and the volatility of exchange rates for developed economies (proxied by an index containing 10 Eurozone countries) and emerging economies (proxied by Brazil and Russia). My findings point to different mechanisms of transmission between sovereign CDS markets and foreign exchange markets with regard to developed and emerging economies: for developed economies, exchange rates affect sovereign CDS spreads through the volatility, whilst in emerging economies the exchange rates affect sovereign CDS spreads at the price level. To further analyse the determinants of sovereign CDS spreads, I incorporate additional macroeconomic fundamentals in addition to exchange rates into a model to explain sovereign CDS spreads. The results show that sovereign CDS spreads are indeed driven by most macroeconomic fundamentals. However, these results do not hold during periods of economic turmoil, in which the rising risk aversion of investors becomes a principal influence behind the sovereign CDS spreads. As changes in exchange rates are able to capture changes to risk aversion through trading in foreign exchange markets, the exchange rate retains its explanatory power to sovereign CDS spreads in 'normal' as well as 'crisis' conditions. Overall, the study provides strong support for the claim that exchange rates are an important determinant of sovereign CDS spreads, in addition to the interest rate which is highlighted in the literature review. The exchange rate - as an important fundamental indicator - can reflect the general domestic economic status, the relative international competitiveness of countries, as well as capture changes in risk aversion among investors. Therefore, using exchange rates to explain sovereign CDS spreads can help to account for both domestic and international dimensions of the 'health' of an economy as well as changes in investors' attitudes.

We analyze the relationship between global and country-specific factors and emerging market debt spreads from three different angles. First, we aim to disentangle the effect of global and country-specific developments, and find that while both country-specific and global developments are important in the long-run, global factors are main determinants of spreads in the short-run. Second, we investigate whether and how the strength of fundamentals is related to the sensitivity of spreads to global factors. Countries with stronger fundamentals tend to have lower sensitivity to changes in global risk aversion. Third, we decompose changes in spreads and analyze the behavior of explained and unexplained components over different periods. To do so, we break down fitted changes in spreads into the contribution of country-specific and global factors, as well as decompose changes in the residual into the correction of initial misalignment and an increase/decrease in misalignment. We find that changes in spreads follow periods of tightening/widening, which are well-explained by the model; and the dynamics of the components of the unexplained residual follow all the major developments that impact market sentiment. In particular, we find that in the periods of severe marketstress, such as during the intensive phase of the Eurozone debt crisis, global factors tend to drive changes in the spreads and the misalignment tends to increase in magnitude and its relative share in actual spreads.

This paper reviews empirical and theoretical work on the links between banks and their governments (the bank-sovereign nexus). How significant is this nexus? What do we know about it? To what extent is it a source of concern? What is the role of policy intervention? The paper concludes with a review of recent policy proposals.

This paper attempts to identify the fundamental variables that drive the credit default swaps during the initial phase of distress in selected European Large Complex Financial Institutions (LCFIs). It uses yearly data over 2004 - 08 for 29 European LCFIs. The results from a dynamic panel data estimator show that LCFIs’ business models, earnings potential, and economic uncertainty (represented by market expectations about the future risks of a particular LCFI and market views on prospects for economic growth) are among the most significant determinants of credit risk. The findings of the paper are broadly consistent with those of the literature on bank failure, where the determinants of the latter include the entire CAMELS structure - that is, Capital Adequacy, Asset Quality, Management Quality, Earnings Potential, Liquidity, and Sensitivity to Market Risk. By establishing a link between the financial and market fundamentals of LCFIs and their CDS spreads, the paper offers a potential tool for fundamentals-based vulnerability and early warning system for LCFIs.