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<p>In the wake of the COVID-19 pandemic, global public debt has escalated, further intensified by ongoing geopolitical tensions. This paper explores the dynamic relationship between sovereign credit risk and exchange rate fluctuations through the innovative application of an ARMA-cDCC-FIGARCH model, focusing on the impact of national characteristics on this correlation. Our findings reveal that depreciations and increased volatility in exchange rates significantly amplify sovereign default risks, with substantial risk spillover effects observed globally. Furthermore, the analysis indicates that financial deepening, trade dependency, and market risk premiums exacerbate the spillovers of sovereign risk into exchange rate fluctuations. In contrast, high debt ratios diminish in influence over time, and robust foreign exchange reserves serve as effective mitigators. These insights provide vital guidance for policymakers and international investors, emphasizing strategic factors critical in managing the complex interdependencies between sovereign risk and currency valuations.</p>

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Dynamic linkages and determinants of sovereign CDS and exchange rates: evidence from G7 and BRICS

  • 期刊论文

  • 出版模式：

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  • 发表日期：

    2025年5月12日

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  • Min Su,
  • Yixuan Ren,
  • Yifang Niu,
  • Zhen Wang

摘要

In the wake of the COVID-19 pandemic, global public debt has escalated, further intensified by ongoing geopolitical tensions. This paper explores the dynamic relationship between sovereign credit risk and exchange rate fluctuations through the innovative application of an ARMA-cDCC-FIGARCH model, focusing on the impact of national characteristics on this correlation. Our findings reveal that depreciations and increased volatility in exchange rates significantly amplify sovereign default risks, with substantial risk spillover effects observed globally. Furthermore, the analysis indicates that financial deepening, trade dependency, and market risk premiums exacerbate the spillovers of sovereign risk into exchange rate fluctuations. In contrast, high debt ratios diminish in influence over time, and robust foreign exchange reserves serve as effective mitigators. These insights provide vital guidance for policymakers and international investors, emphasizing strategic factors critical in managing the complex interdependencies between sovereign risk and currency valuations.