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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: SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon
Dorra Hmaied: IHEC - Institut des Hautes Etudes Commerciales de Carthage

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Abstract: This paper analyzes Credit Default Swaps spread dynamic to determine whether the sovereign Credit Default Swap market is subject to contagion effects. Analysis is performed on credit spreads data of 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 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 county solely show that contagion effects are sterner during the Eurozone crisis comparing 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: Dynamic Conditional Correlation; Sovereign risk spillover; Credit Default Swaps; Contagion phenomenon (search for similar items in EconPapers)
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Date: 2018-06-05
Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01572510
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Published in Review of Quantitative Finance and Accounting, Springer Verlag, 2018

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