Sovereign Credit Default Swaps: Market Developments and Factors behind Price Changes

Junnosuke Shino and Kouji Takahashi
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Kouji Takahashi: Bank of Japan

No 10-E-2, Bank of Japan Review Series from Bank of Japan

Abstract: This paper examines sovereign credit default swaps (CDSs), which have attracted attention since the emergence of the fiscal deficit problem in Greece, with particular focus on the expansion of the sovereign CDS market, the relationship between CDS premiums and fiscal risk variables, and the international co-movement of CDS premiums. The analysis reveals the following: (1) CDS transaction volume has recently expanded rapidly, mainly reflecting the significant increase in fiscal expenditure in some countries and the heightened awareness of European sovereign risk; (2) however, the degree of interrelation between CDS premiums and actual fiscal risk varies by country; and (3) concerns over sovereign risk in some continental European countries may have spilled over to other countries, as seen in the increase in the international co-movement of CDS premiums among major countries.

Date: 2010-04
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