The Relationship Between Volatility and Sovereign Credit Risk in the Emerging Markets: A Nonlinear ARDL Approach

This study investigates the short- and long-run nexus between volatility index of VIX sovereign credit risk represented by CDS spread in emerging markets, namely Turkey, China, Russia, Brazil, Mexico. The markets are at center investors’ interest due to high return opportunities. relationship has been studied many times via linear models. However, financial series exhibit asymmetric dynamics, as clustering, excess kurtosis, others. Thus, we use nonlinear autoregressive distributed lags (NARDL) analysis capture relations risks these countries using daily data from 04.01.2010 29.11.2019. bounds test NARDL model confirms cointegration spreads under study. estimated parameters shows that negative shocks have a long-lasting impact on spreads. Chinese more sensitive changes short run. effect decrease Russian is higher than an increase. Turkish Brazilian reactive increase VIX, whereas Mexican less sensitive. These findings show investors, arbitrageurs speculators should consider global indicators when taking position bonds markets.