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The Global Financial Cycle and country risk in emerging markets during stress episodes: A Copula-CoVaR approach

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  • Melo-Velandia, Luis Fernando
  • Romero, José Vicente
  • Ramírez-González, Mahicol Stiben

Abstract

This paper investigates the tail-dependence structure of emerging market sovereign credit default swaps (CDS) and the Global Financial Cycle (GFC) across eleven emerging markets. Using Copula-CoVaR estimations, we find significant tail-dependence between the GFC, represented by the VIX Volatility Index, and emerging market CDS. These results are essential in the context of distressed global financial markets. Furthermore, our results help evaluate CDS dynamics and provide a more suitable metric to analyze sovereign risk beyond the traditional CoVaR. Moreover, we present additional evidence supporting the importance of the global financial cycle in sovereign risk dynamics in different episodes from 2004 to 2022.

Suggested Citation

  • Melo-Velandia, Luis Fernando & Romero, José Vicente & Ramírez-González, Mahicol Stiben, 2025. "The Global Financial Cycle and country risk in emerging markets during stress episodes: A Copula-CoVaR approach," Research in International Business and Finance, Elsevier, vol. 73(PA).
    • Handle: RePEc:eee:riibaf:v:73:y:2025:i:pa:s0275531924003945
    DOI: 10.1016/j.ribaf.2024.102601
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    More about this item

    Keywords

    Global financial cycle; Country risk; CDS; Copula-CoVaR;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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