Anatomy of a Sovereign Debt Crisis: CDS Spreads and Real-Time Macroeconomic Data

We construct a unique and comprehensive data set of 19 real-time daily macroeconomic indicators for 11 Eurozone countries, for the 5/11/2009{4/25/2013 period. We use this new data set to characterize the time-varying dependence of the cross-section of sovereign credit default swap (CDS) spreads on country-specific macro indicators. We employ daily Fama-MacBeth type cross-sectional regressions to produce time-series of macro-sensitivities, which are then used to identify risk regimes and forecast future equity market volatility. We document pronounced time-variation in the macro-sensitivities, consistent with the notion that market participants focused on very different macro indicators at the different times of the crisis. Second, we identify three distinct crisis risk regimes, based on the general level of CDS spreads, the macro-sensitivities, and the GIPSI connotation. Third, we document the predictive power of the macro-sensitivities for future option-implied equity market volatility, consistent with the notion that expected future risk aversion is an important driver of how CDS spreads impound macro information.