The relationship between the exchange rate and sovereign Credit Default Swaps: An empirical analysis

Dan Stephan Mora-Jensen

Student thesis: Master thesis

Abstract

By sing daily data from the Yen/dollar exchange rate from 8th of March 2005 till 4th of January 2010, the author examines the lead-lag relationship between the Japanese and US credit default swap spreads. The results indicated that in calm none crises time periods there was no relation or Granger Causality effect from either the CDS spreads to the exchange rate or vice versa. In the financial crises period however, there were strong implications of information flow between the CDS spreads on to the exchange rate. There were signals that Japanese CDS spreads had a Granger Causing effect on the exchange rate. For the full period there were results of correlation between both CDS spreads to the exchange rate. When testing for the pre-crises and financial crises periods there were also results implying correlations but the results were stronger in the financial crises period then in the preceding one. The same correlation method confirmed possible spillover effects from the US CDS to the Japanese credit market. The contagion analysis was however limited due to limited theory and to keep within the scope of the thesis paper. Background information on the sovereign economies, especially for Japan was described. The information provided expressed the complex nature of Japans volatile economy and financial sector which is highly significant for the exchange rate and value of the Yen.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2013
Number of pages74