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Dynamic interdependence of sovereign credit default swaps in BRICS and MIST countries

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  • Maria E. de Boyrie
  • Ivelina Pavlova

Abstract

This article examines the interactions of emerging markets sovereign credit default swaps (CDS). Using a generalized vector autoregressive framework and principal component analysis, we find significant spillover effects within the two groups of emerging markets under study. Using the principal component analysis, we show that global financial market factors are important drivers of BRICS and MIST sovereign CDS spreads variability. Focusing on the forecast error variance decomposition, most of the spillover effects are documented among the emerging markets CDS. Brazil and Mexico contribute the largest net directional spillovers to the other emerging markets studied. Highlights : There exist significant CDS spillover effects for MIST and BRICS countries. Mexico dominates the spillover effects within the MIST group while Brazil dominates the spillover effects within the BRICS group. As determined by principal component analysis, global financial market factors are important drivers of BRICS and MIST sovereign CDS spreads variability. There exists a relatively small net directional spillover from global financial market factors to the countries under study; however, the total spillover is time-varying. A large proportion of the forecast error variance in the markets studied comes from spillovers.

Suggested Citation

  • Maria E. de Boyrie & Ivelina Pavlova, 2016. "Dynamic interdependence of sovereign credit default swaps in BRICS and MIST countries," Applied Economics, Taylor & Francis Journals, vol. 48(7), pages 563-575, February.
    • Handle: RePEc:taf:applec:v:48:y:2016:i:7:p:563-575
    DOI: 10.1080/00036846.2015.1083089
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    References listed on IDEAS

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    1. Francis X. Diebold & Kamil Yilmaz, 2009. "Measuring Financial Asset Return and Volatility Spillovers, with Application to Global Equity Markets," Economic Journal, Royal Economic Society, vol. 119(534), pages 158-171, January.
    2. Francis A. Longstaff & Jun Pan & Lasse H. Pedersen & Kenneth J. Singleton, 2011. "How Sovereign Is Sovereign Credit Risk?," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 75-103, April.
    3. Kuhanathan Ano Sujithan & Sanvi Avouyi-Dovi, 2013. "The links between some European financial factors and the BRICS credit default swap spreads," Post-Print hal-01511898, HAL.
    4. repec:dau:papers:123456789/11721 is not listed on IDEAS
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    Cited by:

    1. Haddou, Samira, 2024. "Determinants of CDS in core and peripheral European countries: A comparative study during crisis and calm periods," The North American Journal of Economics and Finance, Elsevier, vol. 71(C).
    2. Oktay Ozkan, 2020. "Time-varying return predictability and adaptive markets hypothesis: Evidence on MIST countries from a novel wild bootstrap likelihood ratio approach," Bogazici Journal, Review of Social, Economic and Administrative Studies, Bogazici University, Department of Economics, vol. 34(2), pages 101-113.
    3. 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.
    4. Zhang, Wenlong & Zhang, Gaiyan & Helwege, Jean, 2022. "Cross country linkages and transmission of sovereign risk: Evidence from China’s credit default swaps," Journal of Financial Stability, Elsevier, vol. 58(C).
    5. Zhizhen Chen & Guifen Shi & Boyang Sun, 2024. "Cross-border spillovers in G20 sovereign CDS markets: cluster analysis based on K-means machine learning algorithm and TVP–VAR models," Empirical Economics, Springer, vol. 67(6), pages 2463-2502, December.
    6. Ballester, Laura & Díaz-Mendoza, Ana Carmen & González-Urteaga, Ana, 2019. "A systematic review of sovereign connectedness on emerging economies," International Review of Financial Analysis, Elsevier, vol. 62(C), pages 157-163.
    7. Gonca Oguz Gok & Mehmet Sahin Gok, 2016. "Emerging Economies: Comparative Analysis of MIST and IBSA Countries," Eurasian Journal of Social Sciences, Eurasian Publications, vol. 4(2), pages 1-13.
    8. Choi, Sun-Yong, 2022. "Volatility spillovers among Northeast Asia and the US: Evidence from the global financial crisis and the COVID-19 pandemic," Economic Analysis and Policy, Elsevier, vol. 73(C), pages 179-193.
    9. Mensi, Walid & Gemici, Eray & Polat, Müslüm & Kang, Sang Hoon, 2025. "Markov switching volatility connectedness across international CDS markets," International Review of Economics & Finance, Elsevier, vol. 98(C).
    10. Lawrence Ogbeifun & Olatunji Shobande, 2020. "Debt sustainability and the fiscal reaction function: evidence from MIST countries," Future Business Journal, Springer, vol. 6(1), pages 1-8, December.
    11. Oleksandr Castello & Marina Resta, 2022. "Modeling the Yield Curve of BRICS Countries: Parametric vs. Machine Learning Techniques," Risks, MDPI, vol. 10(2), pages 1-18, February.

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