SAFE Working Paper No. 276

Does Monetary Policy Impact Sovereign Credit Risk Comovement?

This paper shows that FED policy announcements are accompanied with a significant increase in international co-movement in the sovereign CDS market. The effect is strongest for emerg- ing markets, when the FED relaxes unconventional monetary policies, and for countries that are open to the trading of goods and flows, even with floating exchange rates. The announce- ments also affect closed economies whose currencies are pegged to the dollar. The evidence is consistent with recent theories of a global financial cycle and the pricing of a FED put. In contrast, ECB announcements hardly affect co-movement, even in the Eurozone.


Presented at:

• Financial Intermediation in Emerging Markets Conference in Cape Town (Dec 2016)

• 4th International Conference on Sovereign Bond Markets in Singapore (Apr 2017)

• 16th International Conference on Credit Risk Evaluation in Venice (Sep 2017)

• 15th Paris December Finance Meeting in Paris (Dec 2017)

• 2nd Annual CEBRA International Finance and Macroeconomics Meeting in Madrid (Nov 2018)