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Spillovers and contagion in the sovereign CDS market

Michał Adam
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Michał Adam: Narodowy Bank Polski, Postal: 00-919 Warsaw, 11/21, Świętokrzyska Str., http://www.nbp.pl/

Bank i Kredyt, 2013, vol. 44, issue 6, 571-604

Abstract: This paper focuses on the relationship between sovereign credit default swaps (SCDS) referencing a group of selected developed and emerging economies during the recent sovereign debt crisis. Interdependence and contagion are found on the market dominated by a small number of big international participants. The results show that: (i) a strong commonality exists between global credit spreads (almost half of their variance can be attributed to a single component) with important regional resemblances, (ii) intra-regional spillovers are even more significant, as up to 80% of the forecast error variance of SCDS spreads comes from spillovers, (iii) there is a significant time-variation in spillovers, with contagion from distressed countries gradually diminishing over time as they lose access to bond markets, (iv) the impact of a country’s credit spread on the system appears to be largely liquidity-driven (up to 67% is explained by various liquidity measures).

Keywords: sovereign debt crisis; sovereign credit default swap; sunspot; contagion; spillover index (search for similar items in EconPapers)
JEL-codes: C32 C38 F34 G01 G15 (search for similar items in EconPapers)
Date: 2013
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