6. Conclusion
Financial services companies such as Markit, Ltd., a global financial information and services company that provide daily credit default swap pricing, often cite a high correlation between changes in sovereign CDS spreads and changes in commodity prices. This sentiment is supported by Hilscher and Nosbusch (2010) who ascertain that an increase in the volatility of macroeconomic fundamentals can increase the probability of sovereign debt default. Testing for causality in variance between the two variables using the Lagrange Multiplier (LM) methodology presented by Hafner and Herwartz (2006), this study finds that this relationship does not always hold. While studying the relationship between the CRB indices (i.e., the CC CRB Index, the EW Commodity Index, and six CRB sub-indices) and sovereign CDS spreads for 17 emerging and six frontier economies, it is determined that there is a significant volatility spillover between commodity prices and sovereign CDS spreads for most of the countries under study. The results, however, differ over time and by commodity sector, and are not directly proportional to the amount of commodity exports per country as a percent of exports or GDP. Even though the lack of contribution of commodities to the variance of sovereign spreads for some countries may seem surprising, given that some of these countries are major commodity importers or exporters, it is here put forth the idea that other factors such as political crisis, economic slowdown, changes in monetary policy which ultimately affected the currency value of a country, economic growth prospects, equity market volatility, as well as global economic factors could be the true drivers of volatility in the sovereign CDS spreads of these economies.
