Nonlinearities in Sovereign Risk Pricing: The Role of CDS Index Contracts

Anne-Laure Delatte, Julien Fouquau and Richard Portes

No 19985, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Is the pricing of sovereign risk linear during bearish episodes? Or can initial shocks on economic fundamentals be exacerbated by endogenous factors that create nonlinearities? We test for nonlinearities in the sovereign bond market of European peripheral countries during the debt crisis and explain them. Our estimates based on a panel smooth threshold regression model during January 2006 to September 2012 show four main findings: 1) Peripheral sovereign spreads are subject to significant nonlinear dynamics. 2) The deterioration of market conditions for financial names changes the way investors price risk of the sovereigns. 3) The spreads of European peripheral countries have been priced above their historical values, given fundamentals, because of amplification effects. 4) Two CDS indices on financial names unambiguously stand out as leading drivers of these amplification effects.

JEL-codes: C23 E44 F34 G12 H63 (search for similar items in EconPapers)
Date: 2014-03
New Economics Papers: this item is included in nep-mac and nep-opm
Note: AP IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
http://www.nber.org/papers/w19985.pdf (application/pdf)

Related works:
Working Paper: Nonlinearities in Sovereign Risk Pricing: The Role of CDS Index Contracts (2014)
Working Paper: Nonlinearities in sovereign risk pricing the role of cds index contracts (2014)
Working Paper: Nonlinearities in sovereign risk pricing the role of cds index contracts (2014)
Working Paper: Nonlinearities in sovereign risk pricing the role of cds index contracts (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:19985

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w19985

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().