The impacts of financial crisis on sovereign credit risk analysis in Asia and Europe

Min Zhang, Adam W. Kolkiewicz, Tony S. Wirjanto () and Xindan Li
Additional contact information
Min Zhang: School of Management and Engineering, Nanjing University, Nanjing 210093, P. R. China
Adam W. Kolkiewicz: Department of Statistics & Actuarial Science, University of Waterloo, Waterloo, Ontario N2L 3G1, Canada
Tony S. Wirjanto: Department of Statistics and Actuarial Science and School of Accounting and Finance, University of Waterloo, Waterloo, Ontario N2L 3G1, Canada
Xindan Li: School of Management and Engineering, Nanjing University, Nanjing 210093, P. R. China

International Journal of Financial Engineering (IJFE), 2015, vol. 02, issue 03, 1-57

Abstract: In this paper, we investigate the nature of sovereign credit risk for selected Asian and European countries based on a set of sovereign CDS data over an eight-year period that includes the episode of the 2007–2008 global financial crisis. Our results indicate that there exists strong commonality in sovereign credit risk among the countries studied in this paper following the crisis. In addition, our results also show that commonality is importantly associated with both local and global financial and economic variables. However, there are markedly different impacts of the sovereign of credit risk in Asian and European countries. Specifically, we find that foreign reserve, global stock market, and volatility risk premium, affect Asian and European sovereign credit risks in the opposite direction. Lastly, we model the arrival rates of credit events as a square-root diffusion process from which a pricing model is constructed and estimated over pre- and post-crisis periods. Then the resulting model is used to decompose credit spreads into risk premium and credit-event components. For most countries in our study, credit-event components appear to weight more than risk-premiums.

Keywords: Sovereign credit risk; CDS spread; Asia; Europe; principal component analysis; global financial crisis; local and global financial variables; economic variables; pricing model; square-root diffusion process; risk premium; credit event (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S2424786315500267
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijfexx:v:02:y:2015:i:03:n:s2424786315500267

Ordering information: This journal article can be ordered from

DOI: 10.1142/S2424786315500267

Access Statistics for this article

International Journal of Financial Engineering (IJFE) is currently edited by George Yuan

More articles in International Journal of Financial Engineering (IJFE) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().