EconPapers    
Economics at your fingertips  
 

The impact of tradeoff between risk and return on mean reversion in sovereign CDS markets

Mehdi Mili ()

Research in International Business and Finance, 2019, vol. 48, issue C, 187-200

Abstract: This paper examines whether the intertemporal tradeoffs between risk and return explain mean reversion in sovereign CDS spreads. I test how mean reversion prevents the explosiveness of CDS spreads in Europe. The relationship between risk and return has been widely studied in finance. The results show that, during the pre-crisis period, sovereign CDS spread changes were more consistent with the mean reversion hypothesis for most European countries. I also find strong evidence that the intertemporal tradeoffs between volatility and return explain in part the mean reversion in the markets for European CDS. Moreover, I show that during the crisis period, CDS spreads’ changes are consistent with the random walk hypothesis and mean aversion is more important for large holding periods.

Keywords: Sovereign credit default swap; Markov switching; Mean reversion (search for similar items in EconPapers)
JEL-codes: G12 G13 E43 E44 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0275531918303246
Full text for ScienceDirect subscribers only

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:eee:riibaf:v:48:y:2019:i:c:p:187-200

Access Statistics for this article

Research in International Business and Finance is currently edited by T. Lagoarde Segot

More articles in Research in International Business and Finance from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

 
Page updated 2019-11-19
Handle: RePEc:eee:riibaf:v:48:y:2019:i:c:p:187-200