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Contagion in the Euro area sovereign CDS market: a spatial approach

Author

Listed:
  • Nadia Ben Abdallah
  • Halim Dabbou
  • Mohamed Imen Gallali

Abstract

Purpose - This paper explores whether the Euro-area sovereign credit default swap market is prone to contagion effects. It investigates whether the sharp increase in sovereign CDS spread of a given country is due to a deterioration of the macroeconomic variables or some form of contagion. Design/methodology/approach - For this purpose, the authors use an innovative approach, i.e. spatial econometrics. Although modeling spatial dependence is an attractive challenge, its application in the field of finance remains limited. Findings - The empirical findings show strong evidence of spatial dependence highlighting the presence of pure contagion. Furthermore, evidence of wake-up call contagion-increased sensitivity of investors to fundamentals of neighboring countries and shift contagion-increased sensitivity to common factors are well recorded. Originality/value - This study aims to study a crucial financial issue that gained increased research interest, i.e. financial contagion. A methodological contribution is made by extending the standard spatial Durbin model (SDM) to analyze and differentiate between several forms of contagion. The results can be used to understand how shocks are spreading through countries.

Suggested Citation

  • Nadia Ben Abdallah & Halim Dabbou & Mohamed Imen Gallali, 2023. "Contagion in the Euro area sovereign CDS market: a spatial approach," Journal of Risk Finance, Emerald Group Publishing Limited, vol. 24(5), pages 614-630, September.
  • Handle: RePEc:eme:jrfpps:jrf-10-2022-0283
    DOI: 10.1108/JRF-10-2022-0283
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    More about this item

    Keywords

    Financial contagion; Sovereign CDS spreads; The European sovereign debt crisis; Spatial econometrics; SDM model; C21; C33; H63; F36; G15; F34;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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