Conditional euro area sovereign default risk

Andre Lucas, Bernd Schwaab and Xin Zhang

No 269, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

Abstract: We propose an empirical framework to assess the likelihood of joint and conditional sovereign default from observed CDS prices. Our model is based on a dynamic skewed-t distribution that captures all salient features of the data, including skewed and heavytailed changes in the price of CDS protection against sovereign default, as well as dynamic volatilities and correlations that ensure that uncertainty and risk dependence can increase in times of stress. We apply the framework to euro area sovereign CDS spreads during the euro area debt crisis. Our results reveal significant time-variation in distress dependence and spill-over effects for sovereign default risk. We investigate market perceptions of joint and conditional sovereign risk around announcements of Eurosystem asset purchases programs, and document a strong impact on joint risk.

Keywords: sovereign credit risk; higher order moments; time-varying parameters; financial stability (search for similar items in EconPapers)
JEL-codes: C32 G32 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2013-05-01
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Related works:
Journal Article: Conditional Euro Area Sovereign Default Risk (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:rbnkwp:0269

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