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

Lucia Alessi, Pierluigi Balduzzi and Roberto Savona

No 2019-03, JRC Working Papers in Economics and Finance from Joint Research Centre, European Commission

Abstract: 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.

Keywords: Sovereign crises; Real-time data (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2019-02
New Economics Papers: this item is included in nep-ban, nep-eec and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published by Publications office of the European Union, 2019

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Persistent link: https://EconPapers.repec.org/RePEc:jrs:wpaper:201903

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