CEBA talks 2020-2023
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Impact of the COVID-19 Pandemic on the US Credit Default Swap Market

Authors: Kirill Romanyuk (Associate Professor, HSE University).

Abstract: The COVID-19 pandemic affected the US economy at different levels. Since credit default swaps can be viewed as a default probability proxy, the article shows the credit default swap market perspective on how the US economy was hit by the pandemic. Forecasting models are built to estimate the predictability of the CDS market sectors during the pandemic, i.e., manufacturing, energy, banks, consumer goods, and services and financial sector excluding banks. Econometric tests are applied to check the uniqueness of credit default swap market sectors after the declaration of the pandemic. The results indicate that the financial sector excluding banks performed uniquely during the pandemic; i.e., the predictability of this sector dropped significantly, and the Chow breakpoint test and Wald coefficient test can identify the shift in the data after declaration of the pandemic. Services and Consumer Goods sectors performed during the first year of COVID-19 pandemic similar to post 2008-2009 crisis period.

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