International risk spillover in sovereign credit markets: an empirical analysis

Abstract

Purpose The purpose of this paper is to study the volatility spillover among 33 worldwide sovereign Credit Default Swap (CDS) markets and their underlying bond markets. Design/methodology/approach In contrast to prior studies, the authors incorporate heteroscedasticity, asymmetric leverage effects and long-memory features of sovereign credit spreads simultaneously through a bivariate FIEGARCH model and a Bayesian cointegrated vector autoregressive model. Findings Similar to the literature, the findings confirm that strong evidence of credit risk spillover between credit markets is accentuated during two recent crisis periods. However, the country-by-country analysis indicates that countries exhibit different sensitivity levels and divergent reactions to financial shocks. Further, the authors show that the bidirectional interrelationship evolves over time and across countries emphasizing the necessity of time-varying national regulatory policies and trading positions. Originality/value Based on a large data set that covers the recent two financial crises and using complex methods, the work focuses on sovereign tensions that have repercussions on banks’ solvency and refinancing conditions. Yet, the study is a hot topic since that during crisis periods in the financial markets, direct and indirect interconnections increase between sovereign risk and banking risk. Using new econometric approaches, the results show that each country exhibits a different behavior toward the credit risk which is relevant to both portfolio managers and policy makers. The time-varying spillover effects detected between markets are an accurate indicator of financial stability, allowing policy makers to put in place personalized economic policies. On the other hand, markets’ participants could take advantages of the results by adjusting their trading and hedging positions on the dynamic co-movements. The findings reveal, as well, that the sovereign crisis has more weakened the global financial and banking system than the subprime crisis. The authors previously tackled the cross-country contagion phenomenon in the CDS markets, and this manuscript builds on the prior study to enhance the obtained results.

Security as a key contributor to organisational resilience: a bibliometric analysis of enterprise security risk management

“…Braes and Brooks (2010) argued that as that the exchange rate in the market accelerates, companies require adaptive risk management that responds to and anticipates business changes. Moreover, the interdependence of countries with different regulatory systems influencing the spread of the crisis is to be considered (Sabkha et al 2019).…”

On the informational market efficiency of the worldwide sovereign credit default swaps

“…By inspiring from the work of Sogiakas and Karathanassis (2015) on spot and derivatives markets, our analysis is based on a VECM-FIGARCH(1,d,1)-DCC model. This approach [6] See for example Sabkha et al (2017b) for an empirical study on the interconnectedness and the risk spillover between CDS and the corresponding bond markets. North America Countries decomposition into these categories is made according to the NU, the CIA world Factbook, the IMF and the world Bank criteria.…”

A high-frequency analysis of return and volatility spillovers in the European sovereign bond market

“…Using daily and weekly data on risk spreads and volatilities the authors find that financial stress mainly originates from a few countries and spillover patterns are time-varying across euro-area markets. Sabkha, De Peretti, and Hmaied (2017) study volatility spillovers among 33 global sovereign CDS markets and their underlying bond markets, including the eurozone bond markets, and show that credit risk spillovers are amplified during crisis periods compared to non-crisis periods and exhibit varying levels of sensitivity to financial market turbulence. Schneider, Lillo, and Pelizzon (2018) model the time-series of illiquidity events in the Italian sovereign bond market as a multivariate Hawkes process.…”