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Risk Measurements-credit Default Swaps versus Capital Markets – Relationship, Dynamics and Forecast Ability

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  • Mariya Paskaleva

Abstract

The aim of this research is to explore the rela¬tionship between credit default swaps (CDS) and capital markets in order to measure the degree of information efficiency associated with the ability of CDS to predict financial collapse of these Euro¬pean capital markets: Germany, France, Belgium, Britain, Bulgaria, Romania, Italy, Spain, Portugal, Greece and Ireland for the following period 2003- 2016. Applying correlation analysis and Granger Causality Test, we find different degrees of determination and direction of influence between the two financial markets. It may be explained by time period (turmoil or financial stabilization), market trend and level of development. Using logistic regression we disclose a better “predictive” ability of credit default swaps for countries with developed capital markets, compared to the other countries from the euro area and the emerging markets (Bulgaria and Romania). The crisis as an “economic phenomenon” increases the im¬portance of CDS on developed capital markets and turns them into a “reliable” measure and an “alarm” indicator of upcoming risk.

Suggested Citation

  • Mariya Paskaleva, 2017. "Risk Measurements-credit Default Swaps versus Capital Markets – Relationship, Dynamics and Forecast Ability," Ikonomiceski i Sotsialni Alternativi, University of National and World Economy, Sofia, Bulgaria, issue 4, pages 138-151, October.
    • Handle: RePEc:nwe:iisabg:y:2017:i:4:p:138-151
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    More about this item

    Keywords

    credit default swaps; correlation; Granger Causality Test; Logit Regression Model;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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