The Effects of US Macroeconomic Surprises on the Term Structure of Emerging-market Sovereign Credit Default Swaps

Abstract

Our primary aim in this study is to examine whether US macroeconomic surprises affect the slope of the term structure of national ‘sovereign credit default swap’ (SCDS) spreads in the emerging markets, with our empirical results revealing that positive (negative) US macroeconomic surprises are likely to reduce (increase) the term structure slope of SCDS spreads in the emerging countries. We find that a 1% increase in the slope value of SCDS term structures forecasts a reduction in annual GDP growth at an average rate of 0.0035%, with the slope values in the emerging markets being positively related to future market returns over one-, three- and six-month horizons. Following adjustment by the three global factors of Fama-French (1993), a monthly long-short rebalancing portfolio based upon SCDS slopes in the emerging markets is found to generate an average monthly return of 1.60%. Our results provide general support for the future informational role played by SCDS slopes for national economies within the emerging markets.