IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Sovereign Default Analysis through Extreme Events Identification

Listed author(s):
  • Vasile George MARICA

    ()

    (International Economic Relations, Bucharest University of Economic Studies)

  • Lucian Claudiu ANGHEL

    ()

    (Faculty of Management, National University of Political Studies and Public Administration)

Registered author(s):

    This paper investigates contagion in international credit markets through the use of a novel jump detection technique proposed by Chan and Maheuin (2002). This econometrical methodology is preferred because it is non-linear by definition and not a subject to volatility bias. Also, the identified jumps in CDS premiums are considered as outliers positioned beyond any stochastic movement that can and is already modelled through well-known linear analysis. Though contagion is hard to define, we show that extreme discrete movements in default probabilities inferred from CDS premiums can lead to sound economic conclusions about the risk profile of sovereign nations in international bond markets. We find evidence of investor sentiment clustering for countries with unstable political regimes or that are engaged in armed conflict. Countries that have in their recent history faced currency or financial crises are less vulnerable to external unexpected shocks. First we present a brief history of sovereign defaults with an emphasis on their increased frequency and geographical reach, as financial markets become more and more integrated. We then pass to a literature review of the most important definitions for contagion, and discuss what quantitative methods are available to detect the presence of contagion. The paper continues with the details for the methodology of jump detection through non-linear modelling and its use in the field of contagion identification. In the last sections we present the estimation results for simultaneous jumps between emerging markets CDS and draw conclusions on the difference of behavior in times of extreme movement versus tranquil periods.

    If 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.

    File URL: http://www.managementdynamics.ro/index.php/journal/article/download/138/83
    Download Restriction: no

    File URL: http://www.managementdynamics.ro/index.php/journal/article/view/138/83
    Download Restriction: no

    Article provided by College of Management, National University of Political Studies and Public Administration in its journal Management Dynamics in the Knowledge Economy.

    Volume (Year): 3 (2015)
    Issue (Month): 2 (June)
    Pages: 339-353

    as
    in new window

    Handle: RePEc:nup:jrmdke:v:3:y:2015:i:2:p:339-353
    Contact details of provider: Phone: +40-372.177.141
    Fax: +40-21.317.7007
    Web page: http://www.facultateademanagement.ro/
    Email:


    More information through EDIRC

    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.:

    as
    in new window


    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters,in: This Time Is Different: Eight Centuries of Financial Folly Princeton University Press.
    2. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Debt Intolerance," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 1-74.
    3. Didier, Tatiana & Mauro, Paolo & Schmukler, Sergio L., 2008. "Vanishing financial contagion?," Journal of Policy Modeling, Elsevier, vol. 30(5), pages 775-791.
    4. Andersen, Torben G. & Dobrev, Dobrislav & Schaumburg, Ernst, 2012. "Jump-robust volatility estimation using nearest neighbor truncation," Journal of Econometrics, Elsevier, vol. 169(1), pages 75-93.
    5. Barndorff-Nielsen, Ole E. & Shephard, Neil & Winkel, Matthias, 2006. "Limit theorems for multipower variation in the presence of jumps," Stochastic Processes and their Applications, Elsevier, vol. 116(5), pages 796-806, May.
    6. S. James Press, 1967. "A Compound Events Model for Security Prices," The Journal of Business, University of Chicago Press, vol. 40, pages 317-317.
    7. Kristin J. Forbes & Roberto Rigobon, 2002. "No Contagion, Only Interdependence: Measuring Stock Market Comovements," Journal of Finance, American Finance Association, vol. 57(5), pages 2223-2261, October.
    8. Gilles Saint-Paul, 1992. "Fiscal Policy in an Endogenous Growth Model," The Quarterly Journal of Economics, Oxford University Press, vol. 107(4), pages 1243-1259.
    9. Geert Bekaert & Campbell R. Harvey & Angela Ng, 2005. "Market Integration and Contagion," The Journal of Business, University of Chicago Press, vol. 78(1), pages 39-70, January.
    10. Reinhart, Karmen & Rogoff, Kenneth, 2009. ""This time is different": panorama of eight centuries of financial crises," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 77-114, March.
    11. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2003. "The Unholy Trinity of Financial Contagion," Journal of Economic Perspectives, American Economic Association, vol. 17(4), pages 51-74, Fall.
    12. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-247, April.
    13. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144.
    14. Aizenman, Joshua & Kletzer, Kenneth, 2007. "Economic Growth with Constraints on Tax Revenues and Public Debt: Implications for Fiscal Policy and Cross-Country Differences," Santa Cruz Department of Economics, Working Paper Series qt9421k9hq, Department of Economics, UC Santa Cruz.
    15. Marcello Pericoli & Massimo Sbracia, 2003. "A Primer on Financial Contagion," Journal of Economic Surveys, Wiley Blackwell, vol. 17(4), pages 571-608, September.
    16. Krugman, Paul, 1988. "Financing vs. forgiving a debt overhang," Journal of Development Economics, Elsevier, vol. 29(3), pages 253-268, November.
    17. Suzanne S. Lee & Per A. Mykland, 2008. "Jumps in Financial Markets: A New Nonparametric Test and Jump Dynamics," Review of Financial Studies, Society for Financial Studies, vol. 21(6), pages 2535-2563, November.
    18. Philippe Jorion, 1988. "On Jump Processes in the Foreign Exchange and Stock Markets," Review of Financial Studies, Society for Financial Studies, vol. 1(4), pages 427-445.
    19. Adam, Christopher S. & Bevan, David L., 2005. "Fiscal deficits and growth in developing countries," Journal of Public Economics, Elsevier, vol. 89(4), pages 571-597, April.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:nup:jrmdke:v:3:y:2015:i:2:p:339-353. 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: (Cristian-Mihai VIDU)

    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.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.