Institutional quality and sovereign credit default swap spreads |
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| Authors: | Wei Huang Shu Lin Jian Yang |
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| Affiliation: | 1. Shidler College of Business, University of Hawaii at Manoa, Honolulu, Hawaii;2. Department of Economics, Chinese University of Hong Kong, Shatin, Hong Kong;3. The Business School, University of Colorado Denver, Denver, Colorado |
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| Abstract: | We examine how the quality of political, legal, and regulatory institutions impacts sovereign risk premia. An improvement in institutional quality significantly lowers a country's sovereign credit default swap (CDS) spread, even after controlling for domestic and global macroeconomic factors. The incremental effect of institutional quality may also be economically important in explaining the variations in the level of sovereign CDS spreads. The basic results are robust to alternative model specifications, samples, control variables, measures of institutional quality, estimation methods, and controls for endogeneity. Overall, the evidence suggests that institutional quality may play a significant role in explaining sovereign CDS spreads. |
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| Keywords: | credit default swap sovereign credit risk sovereign credit rating |
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