Spillovers from one country's sovereign debt to CDS (credit default swap) spreads of others during the European crisis: a spatial approach
Articles > Article · 2022
Authors: Gul Huyuguzel Kisla, Y. Gulnur Muradoglu, Asiye Özlem ÖNDER
JOURNAL OF ASSET MANAGEMENT, Journal Indexed in ESCI, International, Emerging Sources Citation Index (ESCI), 2022, vol 23, pp 277-296
DOI: 10.1057/s41260-022-00263-3
Summary
This paper examines the interactions among CDS spreads across 13 European countries using spatial econometrics techniques. Our model allows for the estimation of direct and indirect transmission of sovereign risk and feedback effects across the network of these countries. The novelty of this paper is to link macroeconomic variables and CDS spreads in a new context of analysis to uncover new channels affecting sovereign risk across countries during the European debt crisis. We show that the key channel in driving sovereign risk spillovers is trade linkages between the countries. Our results also reveal that a country's CDS spread is approximately 7 basis points (bps) higher for a 1% increase in public debt-to-GDP levels while that increase in indebtedness is associated with roughly 2 bps higher spreads in all other countries.