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Default Risk of Advanced Economies: An Empirical Analysis of Credit Default Swaps during the Financial Crisis

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  • Stephan Dieckmann
  • Thomas Plank
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    Abstract

    Prices observed in the European sovereign credit default swap (CDS) market have severely increased since the beginning of the financial crisis. We document that the state of a country's financial system and, since the beginning of the crisis, also the state of the world financial system have strong explanatory power for the behavior of CDS spreads, and the magnitude of this impact depends on the importance of a country's financial system pre-crisis. Furthermore, Economic and Monetary Union member countries exhibit higher sensitivities to the health of the financial system. Our results suggest the presence of a private-to-public risk transfer through which market participants incorporate their expectations about financial industry bailouts. Copyright 2012, Oxford University Press.

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    Bibliographic Info

    Article provided by European Finance Association in its journal Review of Finance.

    Volume (Year): 16 (2012)
    Issue (Month): 4 ()
    Pages: 903-934

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    Handle: RePEc:oup:revfin:v:16:y:2012:i:4:p:903-934

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    Cited by:
    1. Marta Gómez-Puig & Simón Sosvilla-Rivero, 2014. "Causality and contagion in EMU sovereign debt markets," Working Papers 2014-03, Universitat de Barcelona, UB Riskcenter.
    2. Giovanni Calice & RongHui Miao & Filip Sterba & Borek Vasicek, 2013. "Short-Term Determinants of the Idiosyncratic Sovereign Risk Premium: A Regime-Dependent Analysis for European Credit Default Swaps," Working Papers 2013/13, Czech National Bank, Research Department.
    3. Lim, Kyuseong & Kim, Min Jae & Kim, Sehyun & Kim, Soo Yong, 2014. "Statistical properties of the stock and credit market: RMT and network topology," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 407(C), pages 66-75.
    4. Groba, Jonatan & Lafuente, Juan A. & Serrano, Pedro, 2013. "The impact of distressed economies on the EU sovereign market," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2520-2532.
    5. Jean-Pierre Allegret & Hélène Raymond & Houda Rharrabti, 2014. "The impact of the global and eurozone crises on European banks stocks Some evidence of shift contagion," EconomiX Working Papers 2014-24, University of Paris West - Nanterre la Défense, EconomiX.
    6. Díaz, Antonio & Groba, Jonatan & Serrano, Pedro, 2013. "What drives corporate default risk premia? Evidence from the CDS market," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 529-563.
    7. Gregory Connor & Brian O'Kelly, 2012. "A Coasean Approach to Bank Resolution Policy in the Eurozone," Economics, Finance and Accounting Department Working Paper Series n233-12.pdf, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
    8. Ureche-Rangau, Loredana & Burietz, Aurore, 2013. "One crisis, two crises…the subprime crisis and the European sovereign debt problems," Economic Modelling, Elsevier, vol. 35(C), pages 35-44.

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