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Eurozone sovereign contagion: Evidence from the CDS market (2005–2010)

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  • Kalbaska, A.
  • Gątkowski, M.
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    Abstract

    This paper analyses the dynamics of the credit default swap (CDS) market of PIIGS, France, Germany and the UK for the period of 2005–2010. The study is performed on the basis of the Datastream and DTCC data on CDS spreads and the BIS data on cross-border exposures. The analysis of the data shows that sovereign risk mainly concentrates in the EU countries. The EWMA correlation analysis and the Granger-causality test demonstrate that there was contagion effect since correlations and cross-county interdependencies increased already after August 2007. Furthermore, the IRF analysis shows that among PIIGS the CDS markets of Spain and Ireland have the biggest impact on the European CDS market, whereas the CDS market of the UK does not cause a big distress in the Eurozone. The adjusted correlation analysis confirms that Greece and other PIIGS (even Spain and Italy) have lower capacity to trigger contagion than core EU countries. Besides, Portugal is the most vulnerable country in the sample, whereas the UK is the most immune to shocks.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

    Volume (Year): 83 (2012)
    Issue (Month): 3 ()
    Pages: 657-673

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    Handle: RePEc:eee:jeborg:v:83:y:2012:i:3:p:657-673

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    Web page: http://www.elsevier.com/locate/jebo

    Related research

    Keywords: Credit default swaps; Sovereign risk; Contagion; PIIGS; Eurozone;

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    References

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    Cited by:
    1. Ludwig, Alexander, 2013. "Sovereign risk contagion in the Eurozone: a time-varying coefficient approach," MPRA Paper 52340, University Library of Munich, Germany.
    2. Stracca, Livio, 2013. "The global effects of the euro debt crisis," Working Paper Series 1573, European Central Bank.
    3. Dimitriou, Dimitrios & Kenourgios, Dimitris, 2013. "Financial crises and dynamic linkages among international currencies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 319-332.
    4. Marta Gómez-Puig & Simón Sosvilla-Rivero, 2014. "“EMU sovereign debt market crisis: Fundamentals-based or pure contagion?”," IREA Working Papers 201402, University of Barcelona, Research Institute of Applied Economics, revised May 2014.
    5. Philippas, Dionisis & Siriopoulos, Costas, 2013. "Putting the “C” into crisis: Contagion, correlations and copulas on EMU bond markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 27(C), pages 161-176.
    6. Miao, Daniel Wei-Chung & Wu, Chun-Chou & Su, Yi-Kai, 2013. "Regime-switching in volatility and correlation structure using range-based models with Markov-switching," Economic Modelling, Elsevier, vol. 31(C), pages 87-93.
    7. Alter, Adrian & Beyer, Andreas, 2012. "The dynamics of spillover effects during the European sovereign debt turmoil," CFS Working Paper Series 2012/13, Center for Financial Studies (CFS).
    8. Stolbov, Mikhail, 2014. "The causal linkages between sovereign CDS prices for the BRICS and major European economies," Economics Discussion Papers 2014-9, Kiel Institute for the World Economy.
    9. Sottile, Pedro, 2013. "On the political determinants of sovereign risk: Evidence from a Markov-switching vector autoregressive model for Argentina," Emerging Markets Review, Elsevier, vol. 15(C), pages 160-185.
    10. Marta Gómez-Puig & Simón Sosvilla-Rivero, 2014. "Causality and contagion in EMU sovereign debt markets," Working Papers 2014-03, Universitat de Barcelona, UB Riskcenter.
    11. Tamakoshi, Go & Hamori, Shigeyuki, 2014. "Co-movements among major European exchange rates: A multivariate time-varying asymmetric approach," International Review of Economics & Finance, Elsevier, vol. 31(C), pages 105-113.

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