Essays on sovereign credit default swaps

This dissertation consists of three essays on sovereign credit default swaps (CDSs). The first essay studies the relationship between the China sovereign and bank CDS spreads and the determinants of the China sovereign CDS spread changes using the copula model and regression analysis. Our results show a strengthened tail dependence of sovereign-bank CDS pairs, and the tail dependence coefficient is higher for commercial banks than for policy banks. U.S. stock market returns, high-yield spread changes, and changes in foreign currency reserve/GDP ratio are important global and macroeconomic factors in explaining variation in China's sovereign credit risk. Domestic factors play important roles in explaining the China sovereign CDS spread changes, especially during the trade war period. The second essay studies the explanatory power of country-level and market-level volatilities for Western European sovereign CDS spreads during the European sovereign debt crisis and short-selling ban periods. We include both historical and option-implied volatility measures. Our results show that the changes in country-specific and market-level volatilities are important factors in explaining the sovereign CDS spread changes and that option-implied volatility contains more information than historical volatility. Our results also raise the question of whether there should be a universal ban on short selling. The last essay examines the dependence structure of the sovereign CDS spreads between the U.S. and 36 countries located in Western Europe, Central & Eastern Europe, Latin America, and Asia. Our results show that the tail dependence coefficients of U.S.-Western European and U.S.-Central & Eastern European sovereign CDS pairs are non-zero. We perform a cross-sectional analysis to study the determinants of co-dependence. The results show that higher trade flow and larger foreign exposure of the U.S. banking system are associated with a higher probability of large joint increases in the sovereign credit risks of the U.S. and European countries.