Variance decomposition of sovereign CDS spreads
In this paper we analyse the information content of correlations between daily changes in CDS spreads. Using factor analysis, we can break down the variance of CDS spreads into global, regional and country-specific components. Our results confirm the finding of other studies, namely that there is a strong global factor underlying credit risk spreads. Comparison of different time samples reveals that the global correlation of spreads has become stronger during the financial crisis; at present, the global factor universally affects emerging and developed countries. CDS spreads are most strongly correlated with other countries in geographically interpretable regional country groups. The Hungarian CDS spread generally follows the global factor; in recent years, the escalating crisis on the periphery of the euro area has also affected the country’s spreads. From the summer of 2010 until the end of the year, country-specific events led to a considerable deterioration in Hungary’s risk assessment. However, the shift in the government’s fiscal policy stance in early 2011 restored most of the lost investor confidence.
References listed on IDEAS
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.:
- Francis A. Longstaff & Jun Pan & Lasse H. Pedersen & Kenneth J. Singleton, 2007.
"How Sovereign is Sovereign Credit Risk?,"
NBER Working Papers
13658, National Bureau of Economic Research, Inc.
- Martín González-Rozada & EduardoLevy Yeyati, 2008.
"Global Factors and Emerging Market Spreads,"
Royal Economic Society, vol. 118(533), pages 1917-1936, November.
- Martín González Rozada & Eduardo Levy Yeyati, 2006. "Global Factors and Emerging Market Spreads," IDB Publications (Working Papers) 6703, Inter-American Development Bank.
- Eduardo Levy Yeyati & Martín González Rozada, 2005. "Global Factors and Emerging Market Spreads," Business School Working Papers globalfactorsspreads, Universidad Torcuato Di Tella.
- Martín González Rozada & Eduardo Levy Yeyati, 2006. "Global Factors and Emerging Market Spreads," Research Department Publications 4445, Inter-American Development Bank, Research Department.
- Eli M. Remolona & Michela Scatigna & Eliza Wu, 2008. "A ratings-based approach to measuring sovereign risk," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(1), pages 26-39.
- Lóránt Varga, 2009. "The information content of Hungarian sovereign CDS spreads," MNB Occasional Papers 2009/78, Magyar Nemzeti Bank (Central Bank of Hungary).
- Patrick McGuire & Martijn A Schrijvers, 2003. "Common factors in emerging market spreads," BIS Quarterly Review, Bank for International Settlements, December.
- Sebastian Edwards, 1983. "LDC's Foreign Borrowing and Default Risk: An Empirical Investigation," NBER Working Papers 1172, National Bureau of Economic Research, Inc.
- Edwards, Sebastian, 1986.
"The pricing of bonds and bank loans in international markets : An empirical analysis of developing countries' foreign borrowing,"
European Economic Review,
Elsevier, vol. 30(3), pages 565-589, June.
- Sebastian Edwards, 1985. "The Pricing of Bonds and Bank Loans in International Markets: An Empirical Analysis of Developing Countries' Foreign Borrowing," NBER Working Papers 1689, National Bureau of Economic Research, Inc.
- 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.
- Steven B. Kamin & Karsten von Kleist, 1999. "The evolution and determinants of emerging market credit spreads in the 1990s," International Finance Discussion Papers 653, Board of Governors of the Federal Reserve System (U.S.).
- Kocsis, Zalán & Mosolygó, Zsuzsa, 2006.
"A devizakötvény-felárak és a hitelminősítések összefüggése - keresztmetszeti elemzés. A cross-section analysis
[The relationship of international bond spreads and sovereign credit ratings]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(9), pages 769-798.
- Barry Eichengreen & Ashoka Mody, 1998. "What Explains Changing Spreads on Emerging-Market Debt: Fundamentals or Market Sentiment?," NBER Working Papers 6408, National Bureau of Economic Research, Inc.
- Edwards, Sebastian, 1984. "LDC Foreign Borrowing and Default Risk: An Empirical Investigation, 1976-80," American Economic Review, American Economic Association, vol. 74(4), pages 726-734, September.
- Sy, Amadou N. R., 2002. "Emerging market bond spreads and sovereign credit ratings: reconciling market views with economic fundamentals," Emerging Markets Review, Elsevier, vol. 3(4), pages 380-408, December.
- Lóránt Varga, 2009. "Hungarian sovereign credit risk premium in international comparison during the financial crisis," MNB Bulletin (discontinued), Magyar Nemzeti Bank (Central Bank of Hungary), vol. 4(2), pages 43-52, July.
When requesting a correction, please mention this item's handle: RePEc:mnb:bullet:v:6:y:2011:i:3:p:36-50. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maja Bajcsy)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.