Can dual-currency sovereign CDS predict exchange rate returns? |
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| Authors: | Xiaoling Pu Jianing Zhang |
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| Institution: | 1. School of Business and Economics, Loughborough University, Sir Richard Morris Building, Leicestershire LE11 3TU, UK;2. Department of Economics, University of Bath, Claverton Down, Bath BA2 7AY, UK;3. RSJ Algorithmic Trading, Na Florenci 2116/15, 110 00 Prague 1, Czech Republic;4. Economic Research Department, Czech National Bank, Na P?íkopě 28, 115 03 Prague 1, Czech Republic |
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| Abstract: | This paper examines both the time-series and cross-sectional variation in the difference between US dollar and Euro denominated sovereign CDS spreads for a group of Eurozone countries. We find that the spread difference between dual-currency sovereign CDS significantly affects the bilateral exchange rate returns. In addition, the difference could predict the cumulative exchange rate returns up to 10 days. The results strongly suggest that the difference contains important information for the exchange rate dynamics at various phases of the crisis. |
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