This study investigates the dynamics of the sovereign CDS term premium for five European countries. The CDS term premium can be regarded as a forward-looking measure of idiosyncratic sovereign default risk as perceived by financial markets. Using a Markov-switching unobserved component model, we...

We study the relationship between cross-sectional sovereign credit risk and currency spot prices. We find that past (up to 12-month average) sovereign credit risk, measured by sovereign credit default swap (CDS) spreads, predict future currency spot returns. In particular, we document a...