Predictability dynamics of emerging sovereign CDS markets

- Time-varying weak-form efficiency of emerging sovereign CDS markets is analyzed.
- We use permutation entropy with a rolling-window framework.
- Emerging sovereign CDS markets have different degrees of time-varying efficiency.
- CDS markets can be weak-form efficient even in the crises episodes.
- We find strong negative relation between sovereign risk and CDS market efficiency.

We compare the time-varying weak-form efficiency of Credit Default Swap (CDS) markets of 15 emerging countries by using permutation entropy approach. We find that CDS markets have different degrees of time-varying efficiency. Using several robustness test, we find that Thailand, China, South Korea and Malaysia have the most efficient CDS markets while South Africa, Colombia and Turkey are the least efficient. Our results show that CDS markets can be efficient even in the crisis episodes. Our findings also suggest a strong negative relation between sovereign risk and CDS market efficiency.