Testing sovereign contagion via changes of CDS price in European debt crisis

2016 ◽  
Vol 38 (1) ◽  
pp. 5-28
Author(s):  
Duong Thi Hieu
Keyword(s):  
Time Series ◽  
Sovereign Debt ◽  
Debt Crisis ◽  
Parametric Method ◽  
Credit Default Swap ◽  
European Sovereign Debt Crisis ◽  
Credit Default ◽  
Regression Approach ◽  
The Stability ◽  
The Uk

Much empirical research has been carried out to test the presence of contagion in European sovereign debt crisis since the beginning of 2010. In this paper I will consider contagion as a change in the transmission mechanism of shock, illustrating co-movement among the sovereign credit default swap (CDS) markets of seven European countries and the UK from November 2008 up until June 2013. By examining daily pricing data of the five-year sovereign CDS contracts of these countries, I found a large increase in the volatility in the period of crisis, and hence a correlation test is invalid, but parametric method with GARCH residual time series and quantile regression approach are applicable. The first test modelling time series’ residuals by GARCH formula shows no contagion. In the second method, slope equality tests analyse the stability in linear relationship among markets across quantile and find no evidence of contagion. This final result of no contagion during the debt crisis suggests that the reason of the sovereign risk’s propagation is the conventional interdependence among countries, not the greatness of the shock.

Credit Default Swaps: A Primer and Some Recent Trends

2020 ◽  
Vol 12 (1) ◽  
pp. 177-192
Author(s):  
David Lando
Keyword(s):  
Sovereign Debt ◽  
Debt Crisis ◽  
Credit Default Swap ◽  
Sovereign Debt Crisis ◽  
European Sovereign Debt Crisis ◽  
Credit Default ◽  
Recent Trends ◽  
Default Swap ◽  
Trading Volumes

The credit default swap (CDS) remains an important class of derivatives contract despite the declining activity in the single-name corporate market. I provide a quick introduction to the contracts, the pricing formula used to interpret the market premiums, the development in trading volumes, and some key insights that are important for understanding its role in markets. I then take a closer look at the CDS-bond basis and the role of trading and regulatory frictions. Finally, the European sovereign debt crisis brought back in focus the notion of a quanto spread, which I explain.

scholarly journals What Factors Influence European Corporate Bond Spread?

2020 ◽  
Vol 15 (4) ◽  
pp. 87
Author(s):  
Maria Cristina Arcuri ◽  
Gino Gandolfi ◽  
Manou Monteux ◽  
Giovanni Verga
Keyword(s):  
Sovereign Debt ◽  
Debt Crisis ◽  
Credit Default Swap ◽  
Corporate Bond ◽  
Sovereign Debt Crisis ◽  
Policy Makers ◽  
Sovereign Bonds ◽  
European Sovereign Debt Crisis ◽  
Credit Default ◽  
Main Determinants

This paper examines the main determinants of corporate euro-bond spread. We analyse a large sample of corporate euro-country bonds over the period May 2005 -January 2012, considering three sub-periods: May 2005- July 2007 (pre-crisis period), August 2007-April 2010 (worldwide financial crisis) and May 2010-January 2012 (European sovereign debt crisis). We show that both liquidity risk and risk related to the country of the issuing firms affect corporate bond spread. We also find that the market yield of corporate bonds issued in the main European countries is, other things being equal, strongly influenced by the risk of the corresponding sovereign bonds and Credit Default Swap (CDS). Finally, we compare the yields of bonds issued by banks with those of bonds issued by firms from other sectors and find that the spread, other things being equal, is significantly higher for banks. These findings may have operating implications for market activity, regulators and policy makers.

Fiscal Governance in the Eurozone: How Effectively Does the Stability and Growth Pact Limit Governmental Debt in the Euro Countries?

2014 ◽  
Vol 3 (2) ◽  
pp. 329-351 ◽  
Author(s):  
Sebastian Koehler ◽  
Thomas König
Keyword(s):  
Sovereign Debt ◽  
Debt Crisis ◽  
Government Debt ◽  
Control Analysis ◽  
Stability And Growth Pact ◽  
Synthetic Control ◽  
Sovereign Debt Crisis ◽  
Growth Pact ◽  
European Sovereign Debt Crisis ◽  
The Stability

The European sovereign debt crisis continues to hold Europe and the world captive. Will the euro and the fiscal mechanism of the eurozone survive? And how effective is the Stability and Growth Pact (SGP)? Do the euro countries generally fail to comply with the rules of fiscal governance, or does the eurozone need a more member-specific fiscal mechanism? This article examines whether and how the SGP influenced the development of government debt making in the euro countries after the introduction of the common currency. While the SGP could not prevent euro countries from exceeding their deficits, this study’s synthetic control analysis reveals that the mechanism has effectively reduced the overall government debt of euro countries since 1999. In particular, donor countries were able to control governmental spending, while many recipient countries—including Greece, Portugal and Italy—have increased government debt ever since, resulting in the European sovereign debt crisis. This suggests that while the SGP effectively constrained overall government debt making, a more sophisticated mechanism is required for safeguarding compliance in large recipient countries.

scholarly journals COUNTERPARTY RISK AND FUNDING: THE FOUR WINGS OF THE TVA

2013 ◽  
Vol 16 (02) ◽  
pp. 1350006 ◽  
Author(s):  
STÉPHANE CRÉPEY ◽  
RÉMI GERBOUD ◽  
ZORANA GRBAC ◽  
NATHALIE NGOR
Keyword(s):  
Sovereign Debt ◽  
Debt Crisis ◽  
Credit Default Swap ◽  
Counterparty Risk ◽  
Credit Crisis ◽  
Executive Summary ◽  
Native Form ◽  
European Sovereign Debt Crisis ◽  
Risk Free Rate ◽  
Debt Valuation

The credit crisis and the ongoing European sovereign debt crisis have highlighted the native form of credit risk, namely the counterparty risk. The related credit valuation adjustment (CVA), debt valuation adjustment (DVA), liquidity valuation adjustment (LVA) and replacement cost (RC) issues, jointly referred to in this paper as total valuation adjustment (TVA), have been thoroughly investigated in the theoretical papers [8, 9]. The present work provides an executive summary and numerical companion to these papers, through which the TVA pricing problem can be reduced to Markovian pre-default TVA BSDEs. The first step consists in the counterparty clean valuation of a portfolio of contracts, which is the valuation in a hypothetical situation where the two parties would be risk-free and funded at a risk-free rate. In the second step, the TVA is obtained as the value of an option on the counterparty clean value process called contingent credit default swap (CCDS). Numerical results are presented for interest rate swaps in the Vasicek, as well as in the inverse Gaussian Hull-White short rate model, which allows also to assess the related model risk issue.

scholarly journals The Role of Redenomination Risk in the Price Evolution of Italian Banks’ CDS Spreads

2020 ◽  
Vol 13 (7) ◽  
pp. 150
Author(s):  
Michele Anelli ◽  
Michele Patanè ◽  
Mario Toscano ◽  
Stefano Zedda
Keyword(s):  
Financial Distress ◽  
Sovereign Debt ◽  
Debt Crisis ◽  
Credit Default Swap ◽  
Merton Model ◽  
Credit Default ◽  
Main Driver ◽  
High Volatility ◽  
Recent Financial Crisis

The recent financial crisis offered an interesting opportunity to analyze the markets’ behavior in a high-volatility framework. In this paper, we analyzed the price discovery process of the Italian banks’ Credit Default Swap (CDS) spreads through the Merton model, extended with the inclusion of a redenomination risk proxy, as to say, the risk that Italy could leave the eurozone. This paper contributes to the literature by integrating the classic Merton model with a political-sensitive market variable able to explain the greatest variance in the Italian banks’ CDS spreads during the most relevant and commonly recognized periods of socio-political and financial distress. Results show that the redenomination risk is progressively becoming the main driver of the process during crises, in particular for the sovereign debt crisis and in 2018.

scholarly journals Sovereign Credit Default Swap and Stock Markets in Central and Eastern European Countries: Are Feedback Effects at Work?

Entropy ◽  
2020 ◽  
Vol 22 (3) ◽  
pp. 338 ◽  
Author(s):  
Sorin Gabriel Anton ◽  
Anca Elena Afloarei Nucu
Keyword(s):  
Emerging Economies ◽  
Stock Markets ◽  
Sovereign Debt ◽  
Debt Crisis ◽  
Credit Default Swap ◽  
Transfer Entropy ◽  
Sovereign Debt Crisis ◽  
Sovereign Credit ◽  
Credit Default ◽  
Default Swap

The purpose of the paper is to investigate the relationship between sovereign Credit Default Swap (CDS) and stock markets in nine emerging economies from Central and Eastern Europe (CEE), using daily data over the period January 2008–April 2018. The analysis deploys a Vector Autoregressive model, focusing on the direction of Granger causality between the credit and stock markets. We find evidence of the presence of bidirectional feedback between sovereign CDS and stock markets in CEE countries. The results highlight a transfer entropy of risk from the private to public sector over the whole period and respectively, from the public to private transfer entropy of risk during the European sovereign debt crisis only in Romania and Slovenia. Another finding that deserves particular attention is that the linkage between the CDS spreads and stock markets is time-varying and subject to regime shifts, depending on global financial conditions, such as the sovereign debt crisis. By providing insights on the inter-temporal causality of the comovements of the CDS–stock markets, the paper has significant practical implications for risk management practices and regulatory policies, under different market conditions of European emerging economies.

Regulation of uncovered sovereign credit default swaps – evidence from the European Union

2015 ◽  
Vol 16 (4) ◽  
pp. 425-443 ◽  
Author(s):  
Florian Kiesel ◽  
Felix Lücke ◽  
Dirk Schiereck
Keyword(s):  
European Union ◽  
Sovereign Debt ◽  
Debt Crisis ◽  
Credit Default Swap ◽  
The European Union ◽  
Content Type ◽  
Sovereign Credit ◽  
Credit Default ◽  
The Impact ◽  
The Eu

Purpose – This study aims to analyze the impact and effectiveness of the regulation on the European sovereign Credit Default Swap (CDS) market. The European sovereign debt crisis has drawn considerable attention to the CDS market. CDS have the ability of a speculative instrument to bet against a sovereign default. Therefore, the Regulation (EU) No. 236/2012 was introduced as the worldwide first uncovered CDS regulation. It prohibits buying uncovered sovereign CDS contracts in the European Union (EU). Design/methodology/approach – First, this paper measures spread changes of sovereign CDS of the EU member states around regulation specific event dates to detect whether and when European sovereign CDS reacts to regulation announcements and the enforcement of regulation. Second, it compares the CDS long-term stability of the EU sample with a non-EU sample based on 44 non-EU sovereign CDS entities. Findings – The results indicate widening CDS spreads prior to the regulation, and stable CDS spreads following the introduction of the regulation. In particular, sovereign CDS of European crisis-hit entities are stable since the regulation was introduced. Originality/value – The results show that since the regulation of uncovered CDS in the EU has been enacted, the sovereign CDS market is stable and less volatile. Based on the theory about speculation on uncovered sovereign CDS by betting on the reference entity’s default, the introduction of Regulation (EU) No. 236/2012 appears to be an appropriate measure to stabilize markets and reduce speculation on sovereign defaults.

scholarly journals MEASURING CONTAGION EFFECT OF GREEK SOVEREIGN DEBT CRISIS ON INDONESIA

2020 ◽  
Vol 13 (2) ◽  
pp. 11-20
Author(s):  
Arif Setiawan
Keyword(s):  
Impulse Response ◽  
Response Function ◽  
Sovereign Debt ◽  
Debt Crisis ◽  
Impulse Response Function ◽  
Credit Default Swap ◽  
Contagion Effect ◽  
Sovereign Risk ◽  
Credit Default ◽  
Auto Regressive

Abstraksi Saat krisis utang Yunani memuncak, banyak negara terkena efek domino sampai derajat tertentu. Indonesia mungkin terkena juga dampak dari krisis walaupun tidak ada jalur yang kuat untuk mengalirkan krisis. Sampai saat ini krisis utang Yunani belum berakhir sepenuhnya dan karenanya perlu untuk mengevaluasi dampak dari krisis terhadap ekonomi Indonesia untuk antisipasi kemungkinan krisis susulan. Menggunakan model Vector Auto Regressive (VAR) untuk menangkap hubungan antara tingkat harga instrumen Credit Default Swap antara dua negara: Indonesia dan Yunani, penelitian ini melakukan estimasi dampak krisis Yunani terhadap Indonesia melalui Impulse Response Function berbasis parameter model VAR. Hasil estimasi menunjukkan dampak krisis Yunani terhadap Indonesia adalah sangat lemah. Hal ini mengindikasikan bahwa investor mungkin telah menyadari bahwa ekonomi Indonesia cukup terisolasi dari krisis Yunani dan karenanya tidak mengubah persepsi sovereign risk Indonesia. Kata Kunci: Krisis Utang Yunani, Efek Domino, Model VAR, Impulse Response Function      Abstract As Greece Debt Crisis emerged, many countries suffered contagion effect to some level. Indonesia might have been affected by the crisis even there was no strong link to transfers the shock. As the debt crisis has not yet over completely, we need to evaluate the impact of previous shock on Indonesian economy to anticipate the possibility of the next event.  Employing Vector Auto Regressive (VAR) model to capture connection between Sovereign Credit Default Swap of two countries we found our estimation of Impulse Response Function of Indonesia CDS on shock in Greece CDS and concluded that the magnitude of debt crisis in uprising credit default risk on Indonesia was considered to be very low. This dynamic told us that investors may have learnt that Indonesian economy was quiet isolated from shock in Greece and they expected no change in the Indonesia sovereign risk. Keywords: Greece Sovereign Debt Crisis, Contagion, VAR Model, Impulse Response Function

scholarly journals The Impact of the Introduction of Uniform European Collective Action Clauses on European Government Bonds as a Regulatory Result of the European Sovereign Debt Crisis

2020 ◽  
Vol 14 (1) ◽  
pp. 1
Author(s):  
Nicoletta Layher ◽  
Eyden Samunderu
Keyword(s):  
European Union ◽  
Sovereign Debt ◽  
Debt Crisis ◽  
Sovereign Debt Crisis ◽  
The European Union ◽  
Bond Yields ◽  
Member States ◽  
Sovereign Bond ◽  
European Sovereign Debt Crisis ◽  
Collective Action Clauses

This paper conducts an empirical study on the inclusion of uniform European Collective Action Clauses (CACs) in sovereign bond contracts issued from member states of the European Union, introduced as a regulatory result of the European sovereign debt crisis. The study focuses on the reaction of sovereign bond yields from European Union member states with the inclusion of the new regulation in the European Union. A two-stage least squares regression analysis is adopted in order to determine the extent of impact effects of CACs on member states sovereign bond yields. Evidence is found that CACs in the European Union are priced on financial markets and that sovereign bond yields do respond to the inclusion of uniform CACs in the European Union.

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