Sovereign credit spread spillovers in Asia

Sovereign credit default swap (CDS) spreads exhibit strong co-movements across Asian countries and regions, including both emerging and developed economies. After controlling for global impacts, we examine the regional lead-lag relationships among changes in ten Asian sovereign CDS spreads. We use the pairwise Granger causality test to find that lagged changes in Kazakhstan's sovereign CDS spreads significantly predict changes in other Asian sovereign CDS spreads. By estimating the news-diffusion model, we find evidence that this predictive relationship may be explained by information diffusion. Furthermore, we find that lagged changes in Kazakhstan's CDS spreads have significant out-of-sample predictive power for other Asian economies, providing practical implications for sustainable investments and risk management.