The Euro Sovereign Debt Crisis, Determinants of Default Probabilities and Implied Ratings in the CDS Market: An Econometric Analysis
AbstractIn this paper we take an innovative econometric look at the Euro Zone Sovereign Debt Crisis. We are particularly interested in understanding which determinants have led investors to ask for higher yields on sovereign debt from the Euro shatter belt. We dismiss the definition of speculation previously used in the literature, on the basis of the irrelevance of Granger Causality as an operational tool for this purpose. Instead, we suggest that speculative behavior would only exist if market assessment would be unrelated to economic fundamentals of such countries. Using a cross section of countries, we improve on the scarce literature on the Econometrics of Credit Default Swap Markets on sovereign debt. Firstly, we use an ordered probit model to determine whether economic fundamentals are driving the implied rating assessments. Secondly, we provide a pioneering application of quantile regression to this domain, to determine which variables matter at different conditional quantiles of the implied default probability distribution. Finally, Fisher’s Z statistic is used to relate bond markets to domestic saving rates. Overall, the different methodologies support the conclusion that the domestic savings rate is lenders’ main concern. Economies with worse saving habits are penalized both in the CDS market, and in the sovereign bonds markets. Notwithstanding, for countries on the top quantiles of the implied default probabilities, public debt and external debt also play a significant role, increasing the likelihood of higher insurance premium in the derivatives market. When looking at the Portuguese Case it seems clear that public policies that fail to take savings into proper account shall always be deemed to fail, as the country had the lowest net savings rate in the EU27 in 2008, followed closely by Greece.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Faculdade de Economia e Gestão, Universidade Católica Portuguesa (Porto) in its series Working Papers de Economia (Economics Working Papers) with number 02.
Length: 18 pages
Date of creation: May 2011
Date of revision:
sovereign debt; Euro Area; Credit Default Swaps; Quantile Regression; Ordered Probit; savings rate;
Other versions of this item:
- Carlos Santos, 2011. "The Euro Sovereign Debt Crisis, Determinants Of Default Probabilities And Implied Ratings In The Cds Market: An Econometric Analysis," Journal of Advanced Studies in Finance, ASERS Publishing, vol. 0(1), pages 53-61, June.
- Santos, Carlos, 2011. "The euro sovereign debt crisis, determinants of default probabilities and implied ratings in the CDS market: an econometric analysis," MPRA Paper 31341, University Library of Munich, Germany.
- C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
- C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hausman, J.A. & Lo, A.W. & MacKinlay, A.C., 1991.
"An Ordered Probit Analysis of Transaction Stock Prices,"
Weiss Center Working Papers
26-91, Wharton School - Weiss Center for International Financial Research.
- Hausman, Jerry A. & Lo, Andrew W. & MacKinlay, A. Craig, 1992. "An ordered probit analysis of transaction stock prices," Journal of Financial Economics, Elsevier, vol. 31(3), pages 319-379, June.
- Jerry A. Hausman & Andrew W. Lo & A. Craig MacKinlay, 1991. "An Ordered Probit Analysis of Transaction Stock Prices," NBER Working Papers 3888, National Bureau of Economic Research, Inc.
- Hausman, Jerry A. & Lo, Andrew W. & MacKinlay, Archie Craig, 1955-, 1990. "An ordered probit analysis of transaction stock prices," Working papers 3234-90., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Lee, Myoung-jae, 1992.
"Median regression for ordered discrete response,"
Journal of Econometrics,
Elsevier, vol. 51(1-2), pages 59-77.
- Koenker R. & Geling O., 2001. "Reappraising Medfly Longevity: A Quantile Regression Survival Analysis," Journal of the American Statistical Association, American Statistical Association, vol. 96, pages 458-468, June.
- Richard Cantor & Frank Packer, 1996.
"Determinants and impacts of sovereign credit ratings,"
9608, Federal Reserve Bank of New York.
- Richard Cantor & Frank Packer, 1996. "Determinants and impact of sovereign credit ratings," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 37-53.
- Yannis Bilias & Roger Koenker, 2001. "Quantile regression for duration data: A reappraisal of the Pennsylvania Reemployment Bonus Experiments," Empirical Economics, Springer, vol. 26(1), pages 199-220.
- J.A.F. Machado & J. M. C. Santos Silva, 2003.
"Quantiles for Counts,"
- Powell, James L., 1984. "Least absolute deviations estimation for the censored regression model," Journal of Econometrics, Elsevier, vol. 25(3), pages 303-325, July.
- Koenker, Roger W & Bassett, Gilbert, Jr, 1978. "Regression Quantiles," Econometrica, Econometric Society, vol. 46(1), pages 33-50, January.
- Cameron,A. Colin & Trivedi,Pravin K., 2005. "Microeconometrics," Cambridge Books, Cambridge University Press, number 9780521848053, October.
- Powell, James L., 1986. "Censored regression quantiles," Journal of Econometrics, Elsevier, vol. 32(1), pages 143-155, June.
- Santos, Carlos, 2008. "Impulse saturation break tests," Economics Letters, Elsevier, vol. 98(2), pages 136-143, February.
- Manski, Charles F., 1985. "Semiparametric analysis of discrete response : Asymptotic properties of the maximum score estimator," Journal of Econometrics, Elsevier, vol. 27(3), pages 313-333, March.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ricardo Goncalves).
If references are entirely missing, you can add them using this form.