Disentangling contagion among sovereign cds spreads during the european debt crisis

Carmen Broto and Gabriel Perez-Quiros (gabriel.perez@bde.es)
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Gabriel Perez-Quiros: Banco de España
Authors registered in the RePEc Author Service: Gabriel Perez Quiros

No 1314, Working Papers from Banco de España

Abstract: During the last crisis, developed economies’ sovereign Credit Default Swap (hereafter CDS) premia have gained in importance as a tool for approximating credit risk. In this paper, we fit a dynamic factor model to decompose the sovereign CDS spreads of ten OECD economies into three components: a common factor, a second factor driven by European peripheral countries and an idiosyncratic component. We use this decomposition to propose a novel methodology based on the real-time estimates of the model to characterize contagion among the ten series. Our procedure allows the country that triggers contagion in each period, which can be any peripheral economy, to be disentangled. According to our findings, since the onset of the sovereign debt crisis, contagion has played a non-negligible role in the European peripheral countries, which confirms the existence of signifi cant financial linkages between these economies.

Keywords: sovereign Credit Default Swaps; contagion; dynamic factor models; credit risk (search for similar items in EconPapers)
JEL-codes: C32 G01 G15 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2013-10
New Economics Papers: this item is included in nep-ban, nep-eec, nep-fmk and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Related works:
Journal Article: Disentangling contagion among sovereign CDS spreads during the European debt crisis (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1314

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