The Credit Default Swap market contagion during recent crises: International evidence

Saker Sabkha (1) , Christian de Peretti (1) , Dorra Hmaied (2)

1 SAF - Laboratoire de Sciences Actuarielle et Financière
2 IHEC - Institut des hautes études commerciales (Carthage, Tunisie)

This paper analyzes Credit Default Swaps spread dynamic to determine whether the sovereign Credit Default Swap market is subject to contagion effects. Analysis is performed on credit spreads data of 35 worldwide countries belonging to four different economic categories over a period from 2006 until 2014, covering the subprime crisis and the European sovereign debt crisis. A novel approach is proposed to estimate the dynamic conditional correlations between CDS spreads using AR(1)-FIEGARCH(1,d,1)-DCC model. Based on our findings, we put a slant on the financial market vulnerability, reinforced by contagion effects during the different phases of the crises. Furthermore, analysis of each county solely show that contagion effects are sterner during the Eurozone crisis comparing to the global financial crisis and that the level of exposure to crises differs across global markets and regions. Yet, our approach provides evidences that crises spread to countries across the world regardless their economic status or geographical positions.

Mots clés: Credit Default Swaps; Contagion phenomenon; Sovereign risk spillover; Dynamic Conditional Correlation

Domaines: Finance [q-fin.GN]

Saker Sabkha, Christian de Peretti, Dorra Hmaied. The Credit Default Swap market contagion during recent crises: International evidence. Review of Quantitative Finance and Accounting, 2018. ⟨hal-01572510⟩