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The impact of distressed economies on the EU sovereign market

Groba, Jonatan and Lafuente, Juan Angel and Serrano, Pedro (2013) The impact of distressed economies on the EU sovereign market. Journal of Banking and Finance, 37 (7). pp. 2520-2532. ISSN 0378-4266

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Abstract

Financially distressed economies inside the European Union (EU) are being blamed for producing a general increase in borrowing costs. This article analyzes the channels of default risk transmission within the EU countries using the information content in the sovereign Credit Default Swap (CDS) market. We proceed in two directions. First, we test the existence of cross-border volatility effects between the central and the peripheral EU countries. Second, we explore the effect of distressed economies on the default and risk premium constituents of sovereign default swaps. We show a significant volatility spillover from distressed to central European Economic and Monetary Union (EMU) economies. This causality pattern leads to a significant impact on the default swap risk premia. On average, the risk premium accounts for approximately 42% of central EMU spreads and 56% of the spreads for those countries outside of the EMU. The peripheral risk also affects the default component of central economies, although its impact is lower.

Item Type: Article
Journal or Publication Title: Journal of Banking and Finance
Uncontrolled Keywords: sovereign CDS ; volatility transmission ; default risk premium
Subjects:
Departments: Lancaster University Management School > Accounting & Finance
ID Code: 69914
Deposited By: ep_importer_pure
Deposited On: 07 Jul 2014 15:40
Refereed?: Yes
Published?: Published
Last Modified: 18 Dec 2017 05:58
Identification Number:
URI: http://eprints.lancs.ac.uk/id/eprint/69914

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