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Spillovers and contagion in the sovereign CDS market

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Abstract

This paper focuses on the relationship between sovereign credit default swaps (SCDS) referencing a group of selected developed and emerging economies during the recent sovereign debt crisis. Interdependence and contagion are found on the market dominated by a small number of big international participants. The results show that: (i) a strong commonality exists between global credit spreads (almost half of their variance can be attributed to a single component) with important regional resemblances, (ii) intra-regional spillovers are even more significant, as up to 80% of the forecast error variance of SCDS spreads comes from spillovers, (iii) there is a significant time-variation in spillovers, with contagion from distressed countries gradually diminishing over time as they lose access to bond markets, (iv) the impact of a country’s credit spread on the system appears to be largely liquidity-driven (up to 67% is explained by various liquidity measures).

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  • Michał Adam, 2013. "Spillovers and contagion in the sovereign CDS market," Bank i Kredyt, Narodowy Bank Polski, vol. 44(6), pages 571-604.
  • Handle: RePEc:nbp:nbpbik:v:44:y:2013:i:6:p:571-604
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    Citations

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    Cited by:

    1. Gonzalo Camba-Méndez & Konrad Kostrzewa & Anna Mospan & Dobromił Serwa, 2014. "Pricing sovereign credit risk of an emerging market," NBP Working Papers 189, Narodowy Bank Polski, Economic Research Department.
    2. Elod Takáts & Abraham Vela, 2014. "International monetary policy transmission," BIS Papers chapters,in: Bank for International Settlements (ed.), The transmission of unconventional monetary policy to the emerging markets, volume 78, pages 25-44 Bank for International Settlements.
    3. Agata Kliber, 2014. "The Dynamics of Sovereign Credit Default Swaps and the Evolution of the Financial Crisis in Selected Central European Economies," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 64(4), pages 330-350, September.
    4. repec:mje:mjejnl:v:12:y:2017:i:3:p:161-174 is not listed on IDEAS
    5. Agata Kliber, 2016. "The leverage effect puzzle: the case of European sovereign credit default swap market," Review of Derivatives Research, Springer, vol. 19(3), pages 217-235, October.
    6. Hassan, Kamrul & Hoque, Ariful & Gasbarro, Dominic, 2017. "Sovereign default risk linkage: Implication for portfolio diversification," Pacific-Basin Finance Journal, Elsevier, vol. 41(C), pages 1-16.
    7. repec:mje:mjejnl:v:13:y:2017:i:3:p:161-174 is not listed on IDEAS

    More about this item

    Keywords

    sovereign debt crisis; sovereign credit default swap; sunspot; contagion; spillover index;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • 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

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