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The information content of Hungarian sovereign CDS spreads


  • Lóránt Varga

    () (Magyar Nemzeti Bank)


In our paper we present how the Hungarian credit default swap (CDS) market functions, and indicate its position in the global credit derivatives markets. Our primary goals are to glean some information from the CDS spreads about Hungary’s credit risk, and to determine the role of the Hungarian sovereign CDS market in different market periods, as well as its long-term relationship with other Hungarian financial markets. Our findings suggest that the Hungarian market has low liquidity compared to the average liquidity of credit derivatives markets. However, relative to the outstanding stock of Hungarian sovereign foreign currency bonds, the daily average turnover of the market and the outstanding stock of Hungarian sovereign CDS contracts at the end of 2007 were substantial, estimated to be around EUR 10-20 million and EUR 7-20 billion respectively. Even though the Hungarian sovereign CDS spread and foreign currency bond credit spread tend to move in tandem in the long run, the two rates may temporarily deviate from one another due to micro structural factors. Hungary’s credit risk premium is primarily defined in the Hungarian sovereign CDS market, which means that any new information pertaining to Hungary’s credit risk is captured in the CDS spreads first. In contrast, the Hungarian foreign currency bond market is not an effective market, given that foreign currency bond credit spreads merely adjust to the changes of CDS spreads afterwards. During particularly turbulent market periods Hungarian sovereign CDS spreads tend to rise higher than is fundamentally justified.

Suggested Citation

  • Lóránt Varga, 2009. "The information content of Hungarian sovereign CDS spreads," MNB Occasional Papers 2009/78, Magyar Nemzeti Bank (Central Bank of Hungary).
  • Handle: RePEc:mnb:opaper:2009/78

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    References listed on IDEAS

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    Cited by:

    1. Zalán Kocsis & Dénes Nagy, 2011. "Variance decomposition of sovereign CDS spreads," MNB Bulletin (discontinued), Magyar Nemzeti Bank (Central Bank of Hungary), vol. 6(3), pages 36-50, October.
    2. Patrick Augustin, 2012. "Sovereign Credit Default Swap Premia," Working Papers 12-10, New York University, Leonard N. Stern School of Business, Department of Economics.
    3. Avino, Davide & Cotter, John, 2014. "Sovereign and bank CDS spreads: Two sides of the same coin?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 32(C), pages 72-85.
    4. Avino, Davide & Cotter, John, 2013. "Sovereign and bank CDS spreads: two sides of the same coin for European bank default predictability?," MPRA Paper 56782, University Library of Munich, Germany.
    5. Debora Revoltella & Fabio Mucci & Dubravko Mihaljek, 2010. "Properly pricing country risk: a model for pricing long-term fundamental risk applied to central and eastern European countries," Financial Theory and Practice, Institute of Public Finance, vol. 34(3), pages 219-245.
    6. repec:rnp:ecopol:ep1708 is not listed on IDEAS
    7. Palladini, Giorgia & Portes, Richard, 2011. "Sovereign CDS and Bond Pricing Dynamics in the Euro-area," CEPR Discussion Papers 8651, C.E.P.R. Discussion Papers.

    More about this item


    credit derivatives markets; credit default swap; sovereign foreign currency bond markets; sovereign credit risk; credit rating; price discovery.;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • 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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