Short-term determinants of the idiosyncratic sovereign risk premium: A regime-dependent analysis for European credit default swaps |
| |
| Institution: | 1. School of Business and Economics, Loughborough University, Sir Richard Morris Building, Leicestershire LE11 3TU, UK;2. Department of Economics, University of Bath, Claverton Down, Bath BA2 7AY, UK;3. RSJ Algorithmic Trading, Na Florenci 2116/15, 110 00 Prague 1, Czech Republic;4. Economic Research Department, Czech National Bank, Na P?íkopě 28, 115 03 Prague 1, Czech Republic;1. UCD Smurfit Graduate School of Business, University College Dublin, Carysfort Avenue, Blackrock, Co. Dublin, Ireland;2. School of Management, Swansea University, Swansea, SA2 8PP Wales, UK;3. ICMA Centre, Henley Business School, University of Reading, Reading, RG6 6BA, UK;1. University of Technology Sydney, UTS Business School, City Campus, PO Box 123 Broadway, NSW 2007, Australia;2. Norges Bank, Bankplassen 2, P.O. Box 1179 Sentrum, 0107 Oslo, Norway;1. LEO-Laboratoire d''Economie d''Orléans, University of Orléans, France;2. Lebow College of Business, Drexel University, Philadelphia, PA, USA;3. IPAG Business School, Paris, France;4. Department of Economics, University of Pretoria, Pretoria 0002, South Africa |
| |
| Abstract: | This study investigates the dynamics of the sovereign CDS term premium, i.e. difference between 10Y and 5Y CDS spreads. It can be regarded a forward-looking measure of idiosyncratic sovereign default risk as perceived by financial markets. For some European countries this premium featured distinct nonstationary and heteroskedastic pattern during the last years. Using a Markov-switching unobserved component model, we decompose the daily CDS term premium of five European countries into two unobserved components of statistically different nature and link them in a vector autoregression to various daily observed financial market variables. We find that such decomposition is vital for understanding the short-term dynamics of this premium. The strongest impacts can be attributed to CDS market liquidity, local stock returns, and overall risk aversion. By contrast, the impact of shocks from the sovereign bond market is rather muted. Therefore, the CDS market microstructure effect and investor sentiment play the main roles in sovereign risk evaluation in real time. Moreover, we also find that the CDS term premium response to shocks is regime-dependent and can be ten times stronger during periods of high volatility. |
| |
| Keywords: | |
| 本文献已被 ScienceDirect 等数据库收录！ |
|
