Society and Economy
Volume/Issue:
Volume 38: Issue 1
Testing sovereign contagion via changes of CDS price in European debt crisis
Author:
Duong Thi Hieu
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Pages:
5–28
Online Publication Date:
Mar 2016
Publication Date:
01 Mar 2016
Article Category:
Research Article
DOI:
https://doi.org/10.1556/204.2016.38.1.2
Keywords:
financial contagion; sovereign credit default swaps; European debt crisis; correlation test; GARCH structure; quantile regression; G12; G15
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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.

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Society and Economy
Print ISSN:
1588-9726
Online ISSN:
1588-970X

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Society and Economy
Language English
Size B5
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Foundation		 1972
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per Year		 1
Issues
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Founder Budapesti Corvinus Egyetem
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ISSN 1588-9726 (Print)
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