Economic Policy Uncertainty and Credit Risk - A cross sectional analysis of company specific CDS spreads across nine industries in the U.S market
Sammanfattning: We analyse the effects political uncertainty has on the credit risk embedded in the term structure of single name credit default swap spreads across nine industries in the United States. After running a set of panel regressions, we find that economic policy uncertainty has a widening effect on the spreads. Specifically, we find that one standard deviation change in economic policy uncertainty moves the spread about 0.4% and has an additional trailing effect of 0.7 % the following month. We argue that the numbers reflect the opportunity cost of not being able to postpone the need of credit insurance during periods of political turmoil. Furthermore, we make a comparison of the financial and the non-financial sectors and conclude that the financial sector is up to 3.4 times more sensible to shocks in policy uncertainty then non-financial sectors.
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