آیا ارز دوگانه مستقل CDS می تواند بازده نرخ ارز را پیش بینی کند؟

This paper examines both the time-series and cross-sectional variation in the difference between US dollar and Euro denominated sovereign CDS spreads for a group of Eurozone countries. We find that the spread difference between dual-currency sovereign CDS significantly affects the bilateral exchange rate returns. In addition, the difference could predict the cumulative exchange rate returns up to 10 days. The results strongly suggest that the difference contains important information for the exchange rate dynamics at various phases of the crisis.

The recent Eurozone debt crisis has severely affected the sovereign debt and derivatives markets. The sovereign credit default swap (CDS) spread, representing the default risk of the underlying country, has rapidly widened since the debt woes have been messier, especially in the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) countries. This paper provides an entirely new perspective to examine difference between dual-currency sovereign CDS spreads and its relation with foreign exchange rate returns. Since our sample is specifically in the Eurozone, we focus on the US dollar and Euro denominated CDS on the same sovereign entity and the exchange rates between the two currencies. We examine the sovereign CDS of both PIIGS and non-PIIGS countries in the Eurozone. In many ways, the comparison in these two groups shows the distinct features across countries with poor and sound financial conditions. Our paper is the first empirical study to investigate whether the differences between dual-currency denominated CDS spreads contain information about the bilateral exchange rate dynamics. The difference between US dollar and Euro denominated CDS spreads is almost zero before the global financial crisis. It has a significant jump after September 2008, and then has been consistently increasing till the end of our sample period. The suddenly widening difference between US dollar and Euro denominated sovereign CDS spreads in the crisis suggests that the information could imply the dynamics of the exchange rate returns and the Euro crash risk. We find that the time series of the difference between US dollar and Euro denominated CDS spreads is closely related with the exchange rates. The larger the difference is, the cheaper the Euro is. The difference could be used to predict the contemporaneous exchange rate returns. By controlling market implied volatilities and funding liquidity, the difference still has a significant impact on the exchange rate returns. In addition, we find that the difference could predict the cumulative exchange rate returns up to 10 days. The predictive power weakens with the increasing time horizon. In a panel analysis, we find that the difference between dual-currency sovereign CDS spreads has a significant impact on the exchange rate returns by controlling the macroeconomic variables for the whole sample, PIIGS countries, and non-PIIGS countries. In particular, the magnitude of the coefficient on the spread differential is bigger in the non-PIIGS countries than that in the PIIGS countries. The results are consistent with the fact that countries with strong economy in the Eurozone have more impact on the Euro to US dollar exchange rate returns. Furthermore, we find the relation becomes stronger in 2010 when the debt crisis is worsening. The remainder of the paper is organized as follows. Section 2 discusses the literature and motivation. Section 3 describes the sovereign CDS, exchange rates and other related data. Section 4 presents the empirical results. Section 5 concludes.

Focusing on the spread difference between dual-currency sovereign CDS is interesting as it provides more general insights into the foreign exchange rates literature. Our analysis is a preliminary step in testing the relation between spread difference and exchange rate returns. The study reveals that the difference between US dollar and Euro denominated CDS spreads is enlarged in the sovereign debt crisis. With the worsening of the debt crisis, the difference would have a larger impact on the excess exchange rate returns. Additionally, the difference has predictive power on the cumulative excess exchange rate returns up to 10 days. With the macroeconomic variables controlled in the panel regression, we find the strong impact of the difference on the exchange rate returns. The impact is especially strong in the year of deep debt crisis. Our findings shed lights on the relation between sovereign CDS markets and currency exchange rate returns, which is helpful to understand the credit market and foreign exchange market integration.