A Hawkes model of the transmission of European sovereign default risk

Ana-Maria Dumitru and Tom Holden

EconStor Conference Papers from ZBW - Leibniz Information Centre for Economics

Abstract: The run-up to the Greek default featured marked increases in the cost of insuring sovereign debt from almost all European countries. One explanation is that market participants believed a default in one country might increase the risk of a future default in another, and so news about one country could impact all others. To test for such dynamic contagion between credit related events in different countries, we develop a procedure for tractably estimating high-dimensional Hawkes models using credit default swap prices. Unlike the prior literature, we are able to perform this estimation via maximum likelihood, even without observing events. We escape the curse of dimensionality by modelling a market portfolio of risk across countries. We find significant spillovers in credit risk between countries, with Spain, Portugal and Greece driving events in the other countries considered.

Keywords: sovereign CDS spreads; credit risk; multivariate self-exciting point process; systemic risk (search for similar items in EconPapers)
JEL-codes: C58 G12 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-eec and nep-ets
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:esconf:168431

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