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Systemic risk spillovers in sovereign credit default swaps in Europe: a spatial approach

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  • Mehdi Mili

    (University of Bahrain)

Abstract

This paper explores systemic risk spillovers between sovereign credit default swaps (CDS) returns in Europe during the period 2006–2016. We model spillovers using a spatial regression approach that allows us to analyze the effects of the movements of CDS returns in terms of spillovers and externalities. The spatial model decomposes the CDS returns into a systemic, systematic and idiosyncratic risk premium. We perform also stress testing to capture the impact of extreme events on CDS portfolios. Our results reveal significant impact of systemic risk spillover on sovereign CDS in Europe. Using Monte Carlo simulation, we show that spillovers between CDS markets increase the risk of CDS portfolios and the risk increases for high spatial interconnectivity between sovereign markets.

Suggested Citation

  • Mehdi Mili, 2018. "Systemic risk spillovers in sovereign credit default swaps in Europe: a spatial approach," Journal of Asset Management, Palgrave Macmillan, vol. 19(2), pages 133-143, March.
    • Handle: RePEc:pal:assmgt:v:19:y:2018:i:2:d:10.1057_s41260-017-0068-1
    DOI: 10.1057/s41260-017-0068-1
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    Cited by:

    1. Matteo Foglia & Eliana Angelini, 2019. "The Time-Spatial Dimension of Eurozone Banking Systemic Risk," Risks, MDPI, vol. 7(3), pages 1-25, July.
    2. Gül Huyugüzel Kışla & Y. Gülnur Muradoğlu & A. Özlem Önder, 2022. "Spillovers from one country’s sovereign debt to CDS (credit default swap) spreads of others during the European crisis: a spatial approach," Journal of Asset Management, Palgrave Macmillan, vol. 23(4), pages 277-296, July.
    3. Saker Sabkha & Christian Peretti & Dorra Hmaied, 2019. "On the informational market efficiency of the worldwide sovereign credit default swaps," Journal of Asset Management, Palgrave Macmillan, vol. 20(7), pages 581-608, December.
    4. Nan, Shijing & Wang, Minna & You, Wanhai & Guo, Yawei, 2023. "Making text count: Identifying systemic risk spillover channels in the Chinese banking sector using annual reports text," Finance Research Letters, Elsevier, vol. 55(PA).

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    More about this item

    Keywords

    Systemic risk; Financial contagion; Spatial regression; CDS returns;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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