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Disentangling contagion among sovereign cds spreads during the european debt crisis

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  • Carmen Broto

    ()
    (Banco de España)

  • Gabriel Perez-Quiros

    ()
    (Banco de España)

Abstract

During the last crisis, developed economies’ sovereign Credit Default Swap (hereafter CDS) premia have gained in importance as a tool for approximating credit risk. In this paper, we fit a dynamic factor model to decompose the sovereign CDS spreads of ten OECD economies into three components: a common factor, a second factor driven by European peripheral countries and an idiosyncratic component. We use this decomposition to propose a novel methodology based on the real-time estimates of the model to characterize contagion among the ten series. Our procedure allows the country that triggers contagion in each period, which can be any peripheral economy, to be disentangled. According to our findings, since the onset of the sovereign debt crisis, contagion has played a non-negligible role in the European peripheral countries, which confirms the existence of signifi cant financial linkages between these economies.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/13/Fich/dt1314e.pdf
File Function: First version, October 2013
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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 1314.

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Length: 38 pages
Date of creation: Oct 2013
Date of revision:
Handle: RePEc:bde:wpaper:1314

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Keywords: sovereign Credit Default Swaps; contagion; dynamic factor models; credit risk;

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Cited by:
  1. Stolbov, Mikhail, 2014. "The causal linkages between sovereign CDS prices for the BRICS and major European economies," Economics Discussion Papers 2014-9, Kiel Institute for the World Economy.

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