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Eurozone sovereign contagion: Evidence from the CDS market (2005–2010)

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  • Kalbaska, A.
  • Gątkowski, M.

Abstract

This paper analyses the dynamics of the credit default swap (CDS) market of PIIGS, France, Germany and the UK for the period of 2005–2010. The study is performed on the basis of the Datastream and DTCC data on CDS spreads and the BIS data on cross-border exposures. The analysis of the data shows that sovereign risk mainly concentrates in the EU countries. The EWMA correlation analysis and the Granger-causality test demonstrate that there was contagion effect since correlations and cross-county interdependencies increased already after August 2007. Furthermore, the IRF analysis shows that among PIIGS the CDS markets of Spain and Ireland have the biggest impact on the European CDS market, whereas the CDS market of the UK does not cause a big distress in the Eurozone. The adjusted correlation analysis confirms that Greece and other PIIGS (even Spain and Italy) have lower capacity to trigger contagion than core EU countries. Besides, Portugal is the most vulnerable country in the sample, whereas the UK is the most immune to shocks.

Suggested Citation

  • Kalbaska, A. & Gątkowski, M., 2012. "Eurozone sovereign contagion: Evidence from the CDS market (2005–2010)," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 657-673.
  • Handle: RePEc:eee:jeborg:v:83:y:2012:i:3:p:657-673
    DOI: 10.1016/j.jebo.2012.05.010
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    References listed on IDEAS

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    More about this item

    Keywords

    Credit default swaps; Sovereign risk; Contagion; PIIGS; Eurozone;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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