This paper applies an multi-factor smooth transition regressive model to capture the
regime-switching behavior of the relation between credit default swap(hereafter CDS) spread and
macroeconomic variables. We have divided the type of time series in the sense of previous
studies(level, transitory component, difference). The results are as follows: First, in preliminary
analysis as linearity test using the Taylor expansion, we find the non-linear relationship between
CDS spreads and explanatory variables which is consistent with the smooth transition regression
used in this study. Second, CDS spread is responded the most by the shock of exchange rate of
among all the macroeconomic variables, followed by the shock of risk-free rate. Third, according
to the market regime, macroeconomic factors have different effects on CDS spread. Fourth, In
prediction section, the coefficients of lagged exchange rate and risk-free rate are statistically
significant. The fact that lagged exchange rate and risk free rate are significantly related to CDS
spreads may be interpreted as evidence of inefficiency in CDS markets. Finally, STR`s s
are larger than linear model`s s on all analysis. These results indicate that smooth
transition regressive models have a better fit.
Key words: Sovereign credit risk, Credit default swap spread, Smooth transition regressive
model(STR), Market condition, Macroeconomic variables.
