The Dynamics of Sovereign Credit Default Swaps and the Evolution of the Financial Crisis in Selected Central European Economies
Year: 2014 Volume: 64 Issue: 4 Pages: 330-350
Abstract: In this paper, we analyze the dynamics of selected sovereign Central European credit default swap (hereinafter referred to as “sovereign CDS” or “sCDS”) prices and investigate regional and European interdependencies among the economies under examination during the period 2008–2011. We focus our attention on the CDS market in Poland, the Czech Republic and Hungary, which are markets that researchers usually put into one “basket”. The aim of our research is to verify to what extent the growth of the CDS premia in these countries during the period under study could be explained by the Hungarian and Greek crises. We apply stochastic volatility models with dynamic conditional correlation, including proxies for the Greek and Hungarian crises, in variance and correlation equations. On the basis of the obtained results, we conclude that regional dependencies between the Polish and Hungarian CDS prices are the strongest among all the analyzed pairs of countries. Both the Hungarian and Greek crises caused a rise in volatility in Central European countries. However, the shocks coming from the Greek market contributed to correlation growth between the Polish and Hungarian markets and, to a lesser extent, to the correlation of the Hungarian and Czech markets.
JEL classification: C32, C58, G01, G15
Keywords: sovereign CDS, government bonds, multivariate stochastic volatility, sunspot
RePEc: http://ideas.repec.org/a/fau/fauart/v64y2014i4p330-350.html
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