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Sovereign Risk Contagion in East Asia: A Mixture of Time-Varying Copulas Approach

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  • Yongwoong Lee
  • KiHoon Hong
  • Kisung Yang

Abstract

This study analyzes sovereign risk contagion between four East Asian economies (China, Hong Kong, Japan, and Korea) and its structural changes through the Global Financial Crisis (GFC) and the European Debt Crisis (EDC) by applying the mixture of time-varying copulas to those economies’ credit default swap (CDS) spreads.This article first finds a strong contagion from the US and PIIGS economies to the East Asian sovereign CDS markets and intraregional contagion within the East Asian markets. Second, the impact of contagion is different according to whether it is measured by the linear (Gaussian) or the upper tail dependence. Third, Japan plays an important role in increasing the linear dependence whereas China and Korea are crucial in terms of the upper tail dependence. Lastly, the GFC has structurally increased the linear dependence but not the upper tail dependence between the East Asian sovereign CDS markets.

Suggested Citation

  • Yongwoong Lee & KiHoon Hong & Kisung Yang, 2018. "Sovereign Risk Contagion in East Asia: A Mixture of Time-Varying Copulas Approach," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 54(7), pages 1513-1537, May.
    • Handle: RePEc:mes:emfitr:v:54:y:2018:i:7:p:1513-1537
    DOI: 10.1080/1540496X.2018.1445989
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    Cited by:

    1. Bouri, Elie & Lucey, Brian & Saeed, Tareq & Vo, Xuan Vinh, 2020. "Extreme spillovers across Asian-Pacific currencies: A quantile-based analysis," International Review of Financial Analysis, Elsevier, vol. 72(C).
    2. Anwer, Zaheer & Khan, Ashraf & Kabir Hassan, M. & Rashid, Mamunur, 2022. "Does the regional proximity lead to exchange rate spillover?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 81(C).

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