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Sovereign default risk linkage: Implication for portfolio diversification

Kamrul Hassan, Ariful Hoque () and Dominic Gasbarro

Pacific-Basin Finance Journal, 2017, vol. 41, issue C, 1-16

Abstract: Dynamic conditional correlation, principal components analysis, and impulse response function analysis are employed to examine the interdependence of sovereign credit default swaps (SCDS) in the different emerging market regions of Asia, Europe and Latin America. Using these measures, Asian emerging markets show strong linkage among themselves, both during and after the financial crisis, but less responsive to shocks in European and Latin American regions. Emerging markets in Europe and Latin America have weaker regional bonds than Asian markets. Accordingly, knowledge of the varying correlations, commonality and persistence of shocks existing in intra- and inter-regional markets provides insight for superior portfolio diversification with SCDS.

Keywords: Dynamic conditional correlation; Impulse response function; Sovereign credit default swaps (search for similar items in EconPapers)
JEL-codes: F3 G11 G15 (search for similar items in EconPapers)
Date: 2017
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