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The Credit Default Swap market contagion during recent crises: international evidence

Saker Sabkha (), Christian de Peretti () and Dorra Hmaied ()
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Saker Sabkha: Univ Lyon, Université Claude Bernard Lyon, Institut de Science Financière et d’Assurances, Laboratoire de Sciences Actuarielle et Financière SAF-EA2429
Dorra Hmaied: Université de Carthage, Institut des Hautes Études Commerciales de Carthage, Laboratoire d’Économie et de Finance Appliquée (LEFA)

Review of Quantitative Finance and Accounting, 2019, vol. 53, issue 1, 1-46

Abstract: Abstract This paper analyzes Credit Default Swap spread dynamics to determine whether the sovereign Credit Default Swap market is subject to contagion effects. Analysis is performed on credit spreads data from 35 worldwide countries belonging to four different economic categories over a period from 2006 until 2014, covering the subprime crisis and the European sovereign debt crisis. A novel approach is proposed to estimate the Dynamic Conditional Correlations between CDS spreads using the AR(1)-FIEGARCH(1,d,1)-DCC model. Based on our findings, we put a slant on the financial market vulnerability, reinforced by contagion effects during the different phases of the crises. Furthermore, analysis of each country solely shows that contagion effects are sterner during the Eurozone crisis compared to the global financial crisis and that the level of exposure to crises differs across global markets and regions. Yet our approach provides evidences that crises spread to countries across the world regardless their economic status or geographical positions.

Keywords: Sovereign risk spillover; Credit Default Swaps; Contagion phenomenon; Dynamic Conditional Correlation (search for similar items in EconPapers)
JEL-codes: E44 G01 G10 G15 (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:kap:rqfnac:v:53:y:2019:i:1:d:10.1007_s11156-018-0741-6