The Impact of Distressed Economies in the EU Sovereign Market

Posted: 29 Mar 2012 Last revised: 21 Oct 2017

See all articles by Jonatan Groba

Jonatan Groba

Strategic Link

Juan Angel Lafuente

Jaume I University

Pedro Serrano

University Carlos III of Madrid - Department of Business Administration

Date Written: July 1, 2013

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.

Keywords: Sovereign CDS, volatility transmission, default risk premium

JEL Classification: G1, F34

Suggested Citation

Groba, Jonatan and Lafuente, Juan Angel and Serrano, Pedro, The Impact of Distressed Economies in the EU Sovereign Market (July 1, 2013). Journal of Banking and Finance, Vol. 37, No. 7, 2013. Available at SSRN: https://ssrn.com/abstract=2030368 or http://dx.doi.org/10.2139/ssrn.2030368

Jonatan Groba

Strategic Link

Kennesaw, GA 30144
United States

Juan Angel Lafuente

Jaume I University ( email )

Castellon
E-12071 Castello de la Plana, Castellón de la Plana 12071
Spain

Pedro Serrano (Contact Author)

University Carlos III of Madrid - Department of Business Administration ( email )

C/ Madrid, 126
Getafe, Madrid 28903
Spain
+34916248926 (Phone)

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
1,074
PlumX Metrics