Списание За Наука "Ново Знание" Macroeconomic Determinants of CDS: The Case of Europe (original) (raw)
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Sovereign bond spreads and CDS premia in the Eurozone: A causality analysis
2020
This article presents an analysis of the possible relationship between the spreads of sovereign bonds and the premia of credit default swaps (CDS) to determine whether they are useful tools for the measurement of the sovereign risk either separately or by taking into account the joint evolution of their values. The data refer to ten countries in the Eurozone along 2008–2016. By applying the causality Granger test for these variables, after six different ways of proxy, CDS premia are found to be the cause of the risk spreads in certain cases, although a bidirectional relationship is predominant in many other cases. So the CDS market contains clear and highly useful information on the sovereign risk.
2020
Recent studies suggested that financial markets correlations and volatilities change during crisis periods. This paper presents a practical framework to test the volatility of sovereign credit default market and sovereign bond market indexes during the sovereign crisis period. Furthermore, our research tests the dynamic relationship between the sovereign CDS market evolution and the sovereign bond market, based on a sample of 10 developed Eurozone countries. Then, we integrate the bond debt's sensitivity presented by its maturity, which is a line of research supported by previous studies. Our results show that both markets are sensitive to internal shocks. Moreover, the dynamic relationship between the two markets is more sensitive to negative information than positive information. Finally, maturity significantly affects the sensitivity of sovereign bonds to CDS market evolution. This study contributes to the empirical literature by presenting, to the best of our knowledge, an unprecedented empirical investigation of the sovereign bond maturity effect's sensitivity to the sovereign CDS market evolution.
Journal of Business Economics and Management
This study provides a dynamic analysis of the lead-lag relationship between sovereign Credit Default Swap (CDS) and bond spreads of the highly indebted southern European countries, considering an extensive time sample from the period before the global financial crisis to the latest developments of the sovereign indebtedness in the euro area. We employ an integrated price discovery methodology on a rolling sample, with the intention to shed light on whether the CDS spreads can trigger rises in bond spreads, and the relative efficiency of credit risk pricing in the CDS and bond markets. In addition, we attempt to depict the evolution of the price discovery process regarding the direction of influence from one market to the other. The rolling window analysis verifies that the price discovery process evolves over time, presenting frequent alternations concerning the leading market. We find that during periods of economic turbulence the CDS market leads the bond market in price discovery...
Sovereign Default Swap Market Efficiency and Country Risk in the Eurozone
SSRN Electronic Journal, 2000
This paper uses sovereign CDS spread changes and their volatilities as a proxy for the informational efficiency of the sovereign markets and persistency of country risks. Specifically, we apply semi-parametric and parametric methods to the sovereign CDSs of 10 eurozone countries to test the evidence of long memory behavior during the financial crisis. Our analysis reveals that there is no evidence of long memory for the spread changes, which indicates that the price discovery process functions efficiently for sovereign CDS markets even during the crisis. In contrast, both semi-parametric methods and the dual-parametric model imply persistent behavior in the volatility of changes for Greece, Portugal, Ireland, Italy, Spain, and Belgium addressing persistent sovereign uncertainty. We provide evidence of causality from volatility in CDS prices to sovereign risk premiums for these peripheral economies. We furthermore demonstrate the potential spillover effects of spread changes among eurozone countries by estimating dynamic conditional correlations.
CDS Spreads: An Empirical Analysis of European Countries
2015
This thesis investigates how credit default risk as reflected in credit default swap (CDS) spread is transferred in the European countries. The first part observes the default risk transfer between the sovereign debt and the domestic financial institutions of the European countries during the European sovereign debt crisis. The previous literature indicates that a "two-way feedback" effect exists between the two sectors. In this part, the bailouts by the European Financial Stability Facility are used as breakpoints to examine the changes in the default risk transfer between the two sectors. The results suggest that the two-way feedback effect does not exist after the first Greek bailout. The shocks in the financial sector transmitting to the sovereign debts become either negative or insignificant in both the short and the long runs. Subsequent to the first Greek bailout, the private-to-public risk transfer no longer exerts significant impacts, regardless of later bailouts issued to the other countries. The second part further examines the structural regimes in the cointegration relationship of default risk between the two sectors. The empirical results indicate that the private-to-public risk transfer becomes stronger in the 'atypical' regimes, which covers the crisis periods. The approach of identifying changes in regime is robust, and the detected thresholds also confirm that it is reasonable using the EFSF bailout events as breakpoints. The final empirical chapter focuses on the crosscountry cointegration of sovereign default risk, and takes note of the role of investor sentiment in explaining the risk transfer. The findings show that investor sentiment is capable to predict regimes in the sovereign default risk in the short run. During crisis periods, the trench of the sovereign default risk is wider, but the elasticity is smaller, indicating more difficulties for the countries to close the gap of the default risk.
Sovereign CDS and Bond Pricing Dynamics in the Euro-area
2011
This analysis tests the price discovery relationship between sovereign CDS premia and bond yield spreads on the same reference entity. The theoretical no-arbitrage relationship between the two credit spreads is confronted with daily data from six Euro-area countries over the period 2004-2011. As a first step, the supposed non stationarity of the two series is verified. Then, we examine whether the non-stationary CDS and bond spreads series are bound by a cointegration relationship. Overall the cointegration analysis confirms that the two prices should be equal to each other in equilibrium, as theory predicts. Nonetheless the theoretical value [1, -1] for the cointegrating vector is rejected, meaning that in the short run the cash and synthetic market's valuation of credit risk differ to various degrees. The VECM analysis suggests that the CDS market moves ahead of the bond market in terms of price discovery. These findings are further supported by the Granger Causality Test: for most sovereigns in the sample, past values of CDS spreads help to forecast bond yield spreads. Short-run deviations from the equilibrium persist longer than it would take for participants in one market to observe the price in the other. That is consistent with the hypothesis of imperfections in the arbitrage relationship between the two markets.
Impacts of the financial crisis on eurozone sovereign CDS spreads
Journal of International Money and Finance, 2014
We study the variation of sovereign credit default swaps (CDSs) of eurozone countries, their persistence and co-movements, with particular attention given to the impact of the financial crisis. Specifically, using a dual fractional integration model, we test the evidence of long memory for CDSs of ten eurozone countries. Our analysis reveals that price discovery processes satisfy the minimum requirements for a weak form of efficiency for sovereign CDS markets, even during the crisis. In contrast, we document the spreading out of persistent CDS uncertainty among the peripheral economies with its outbreak. We provide evidence that CDS uncertainty has implications for the pricing of sovereign risk including that of core countries in the crisis period. Finally, we present the potential spillover effects utilizing a dynamic q The authors wish to thank to the managing guest editor
Unveiling Sovereign Effects in European Banks CDS Spreads Variations
SSRN Electronic Journal, 2000
Starting from the structural model developed by and the derived notion of distanceto-default, we study the determinants of credit default swap (CDS) spreads for a sample of European banks over a period from January 2006 to December 2011. In particular, we test variables that are specific to the banking industry and look at the possible interaction with CDS spreads for the related sovereigns. We confirm findings from the literature review regarding the low significance of the structural model and its breakdown in times of stress. We confirm the importance of macro-economic components such as the general level of interest rates and the general state of the economy, particularly in times of stress. We find that before the crisis period the micro-and macro-components are generally predominant in the determination of CDS spread variations while the influence of sovereigns' CDS become more important when entering further into the crisis period. Interestingly, southern European countries are the first to become significant at the start of the crisis. Progressively, all CDS countries become increasingly significant, overweigh all other explanatory variables and remain so even after the crisis period, thereby suggesting the focused attention of market participants for the sovereign dimension.
SOVEREIGN SECURITY AND RISK MANAGEMENT BY CREDIT DEFAULT SWAPS
This paper explores the importance of credit default swap (CDS) as a tool for credit and sovereign risk management. We prove that although the explored countries are members of the EU, it is the autonomous monetary policy that matters. The increasing importance of the macroprudential approach for maintaining the sustainability of the financial system and the dynamics of CDS in European countries is revealed. Evidence for the existence of the "CDS paradox" phenomenon is proved. The relationship between the CDS and banking sector seems to be sustainable and it creates the prerequisites for the occurrence of "twin crisis" by transferring information flows and shocks from the banking system to the sovereign CDS and vice versa.
Cross-Country Linkages and Asymmetries of Sovereign Risk Pluralistic Investigation of CDS Spreads
Sustainability, 2022
Credit Default Swap (CDS) spread is a realistic measure of credit risk. Changes in the spreads showcase changes in the underlying uncertainty or credit volatility regarding the credit risk, associated with the asset class. We use Multifractal Detrended Fluctuation Analysis (MF-DFA) to further investigate the presence of asymmetries and the difference between Greece and G7 countries in terms of credit risk. We have considered 2587 daily observations for each of the 48 CDS spreads. Hence, a total of 124,176 data points were under consideration across six yearly CDS categories of Greece and most of the G7 countries (Germany, USA, UK, Canada, Japan). The tenure of these CDS were 1 year, 2 years, 3 years, 5 years, 7 years, 10 years, 20 years, and 30 years. We have found that the Greek CDS spread movement is purely stochastic and anti-persistent, having practically no predictability at all. On the other hand, the remaining countries’ CDSs were highly predictable, showing a consistent long memory or long-range dependence, having embedded the bubble caused by herding. This is reflected in terms of flight-to-quality behavior and in estimates of CDS premiums for insurance against a default on government bonds.