Variance decomposition of sovereign CDS spreads
AbstractIn this paper we analyse the information content of correlations between daily changes in CDS spreads. Using factor analysis, we can break down the variance of CDS spreads into global, regional and country-specific components. Our results confirm the finding of other studies, namely that there is a strong global factor underlying credit risk spreads. Comparison of different time samples reveals that the global correlation of spreads has become stronger during the financial crisis; at present, the global factor universally affects emerging and developed countries. CDS spreads are most strongly correlated with other countries in geographically interpretable regional country groups. The Hungarian CDS spread generally follows the global factor; in recent years, the escalating crisis on the periphery of the euro area has also affected the country’s spreads. From the summer of 2010 until the end of the year, country-specific events led to a considerable deterioration in Hungary’s risk assessment. However, the shift in the government’s fiscal policy stance in early 2011 restored most of the lost investor confidence.
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Bibliographic InfoArticle provided by Magyar Nemzeti Bank (the central bank of Hungary) in its journal MNB Bulletin.
Volume (Year): 6 (2011)
Issue (Month): 3 (October)
credit spreads; factor analysis; procrustes rotation;
Find related papers by JEL classification:
- C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Factor Analysis
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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