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Disentangling contagion among sovereign CDS spreads during the European debt crisis

Carmen Broto () and Pérez-Quirós, Gabriel
Authors registered in the RePEc Author Service: Gabriel Perez Quiros

Journal of Empirical Finance, 2015, vol. 32, issue C, 165-179

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 significant 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)
Date: 2015
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Working Paper: Disentangling contagion among sovereign cds spreads during the european debt crisis (2013) Downloads
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Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

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