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Market perception of sovereign credit risk in the euro area during the financial crisis

Gonzalo Camba-Mendez () and Dobromił Serwa ()

No 185, NBP Working Papers from Narodowy Bank Polski, Economic Research Department

Abstract: We study market perception of sovereign credit risk in the euro area during the financial crisis. In our analysis we use a parsimonious CDS pricing model to estimate market implied measures of the probability of default (PD) and of the loss given default (LGD). We find that separate identification of PD and LGD appears empirically tractable for a number of euro area countries. In our empirical results the estimated market implied LGDs stay comfortably below 40% in most of the samples. We also find that macroeconomic and institutional developments were only weakly correlated with the market perception of sovereign credit risk, whereas financial contagion appears to have exerted a non-negligible effect.

Keywords: sovereign credit risk; CDS spreads; euro area; probability of default; loss given default (search for similar items in EconPapers)
JEL-codes: C11 C32 G01 G12 G15 (search for similar items in EconPapers)
Date: 2014
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Related works:
Journal Article: Market perception of sovereign credit risk in the euro area during the financial crisis (2016) Downloads
Working Paper: Market perception of sovereign credit risk in the euro area during the financial crisis (2014) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:nbp:nbpmis:185

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