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Analyzing volatility shocks to Eurozone CDS spreads with a multicountry GMM model in Stata

Author

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  • Christopher F Baum

    (Boston College
    DIW Berlin)

  • Paola Zerilli

    (University of York)

Abstract

We model the time series of credit default swap (CDS) spreads on sovereign debt in the Eurozone, allowing for stochastic volatility and examining the effects of country-specific and systemic shocks. A weekly volatility series is produced from daily quotations on 11 Eurozone countries: CDS for 2009–2010. Using Stata's gmm command, we construct a highly nonlinear model of the evolution of realized volatility when subjected to both idiosyncratic and systemic shocks. Evaluation of the quality of the fit for the 24 moment conditions is produced by a Mata auxiliary routine. This model captures many of the features of these financial markets during a turbulent period in the recent history of the single currency. We find that systemic volatility shocks increase returns on "virtuous" borrowers' CDS while reducing returns for the most troubled countries' obligations.

Suggested Citation

  • Christopher F Baum & Paola Zerilli, 2016. "Analyzing volatility shocks to Eurozone CDS spreads with a multicountry GMM model in Stata," United Kingdom Stata Users' Group Meetings 2016 07, Stata Users Group.
    • Handle: RePEc:boc:usug16:07
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