Determinants and price discovery of China sovereign credit default swaps

We study the determinants of levels and changes of sovereign credit default swap (CDS) spreads in China from January 2001 to December 2010. Both country-specific factors (such as the China stock market index and the real interest rate) and global factors (the U.S. S&P 500 stock option volatilities and default spreads, and the non-North America global stock market factor) have significant explanatory power on CDS spreads in terms of both level and in changes. China’s domestic economic factors were more relevant in explaining the CDS spread levels and changes in the earlier years, while the impact of global factors has become increasingly important in recent years, particularly during the global crisis. Within a vector autoregressive (VAR) model controlling for exogenous variables, we find that China sovereign CDS spread changes lead stock returns.