CDS spreads and systemic risk: A spatial econometric approach

Sebastian Keiler and Armin Eder ()

No 01/2013, Discussion Papers from Deutsche Bundesbank

Abstract: This study applies a novel way of measuring, quantifying and modelling the systemic risk within the financial system. The magnitude of risk spill over effects is gauged by introducing a specific weighting scheme. This approach originally stems from spatial econometrics. The methodology allows for a decomposition of the credit spread into a systemic, systematic and idiosyncratic risk premium. We identify considerable risk spill overs due to the interconnectedness of the financial institutes in the sample. In stress tests, up to one fifth of the CDS spread changes are owing to financial contagion. These results also give an alternative explanation for the nonlinear relationship between a debtor's theoretical probability of default and the observed credit spreads - known as the credit spread puzzle.

Keywords: systemic risk; financial contagion; spatial econometrics; CDS spreads; government policy and regulation (search for similar items in EconPapers)
JEL-codes: C21 G12 G18 G21 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-ban, nep-ecm, nep-fmk, nep-geo and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/68603/1/735351171.pdf (application/pdf)

Related works:
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:zbw:bubdps:012013

Access Statistics for this paper

More papers in Discussion Papers from Deutsche Bundesbank Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().