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Paper Title: Determinants of Sovereign CDS spread of Pakistan:
An Empirical Study Using ARDL Approach
Abstract:
 
This study examines the determinants of sovereign Credit Default Swaps (CDS) spreads of Pakistan by using quarterly data from Jan 2005 to Dec 2015 by employing Bounds Testing Procedure proposed by Pesaran et al (2001). Autoregressive distributive lag approach has been applied as it yields consistent estimates of the long-run coefficients that are asymptotically normal irrespective of whether the underlying regressors are I(0) or I(1). Data has been tested to examine the econometric problems but no potential econometric problem has been observed. Results reveal that lag of SCDS, reserve/debt ratio and risk-free rate of return have significant long run effect on sovereign CDS spreads of Pakistan. The error correction model based on ARDL approach captures the short term dynamics of prices and confirms that changes in debt/Export ratio and Exchange rate fluctuations have significant short term effect. ECM term suggests that adjustment process is quite fast. CUSUM and CUMSUMQ are within the critical bounds of 5% indicating that the model is structurally stable. This is the first study which is trying to find out the determinants of sovereign CDS in Pakistan using ARDL Bound testing approach. In addition, as the sovereign CDS spreads is a potential substitute to Credit Ratings as the leading indicator of sovereign risk, hence, this paper can help facilitate the architects of Fiscal and Monetary Policy to shape up the policies so as to improve the indicators of sovereign risk in the International Debt Market, as a result it would be easier for Pakistan to raise funds from International market and that too with favorable terms and conditions.

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Dr Asfia Obaid
Conference Convener
Email:asfia.obaid@nbs.nust.edu.pk
Tel: 00-92-51-90853201

Mr Kashir Asghar
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Email:kashir.asghar@nbs.nust.edu.pk
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