Market Perception of Sovereign Credit Risk in the Euro Area During the Financial Crisis

37 Pages Posted: 12 Aug 2014

See all articles by Gonzalo Camba-Mendez

Gonzalo Camba-Mendez

European Central Bank (ECB)

Dobromil Serwa

National Bank of Poland; Warsaw School of Economics (SGH)

Multiple version iconThere are 2 versions of this paper

Date Written: June 5, 2014

Abstract

We study market perception of sovereign credit risk in the euro area during the financial crisis. In our analysis we use a parsimonious CDS pricing model to estimate the probability of default (PD) and the loss given default (LGD) as perceived by financial markets. We find that separate identification of PD and LGD appears empirically tractable for a number of euro area countries. In our empirical results the estimated LGDs perceived by financial markets stay comfortably below 40% in most of the samples. We also find that macroeconomic and institutional developments were only weakly correlated with the market perception of sovereign credit risk, whereas financial contagion appears to have exerted a non-negligible effect.

Keywords: sovereign credit risk, CDS spreads, euro area, probability of default, loss given default

JEL Classification: C11, C32, G01, G12, G15

Suggested Citation

Camba-Mendez, Gonzalo and Serwa, Dobromil, Market Perception of Sovereign Credit Risk in the Euro Area During the Financial Crisis (June 5, 2014). ECB Working Paper No. 1710, Available at SSRN: https://ssrn.com/abstract=2446491

Gonzalo Camba-Mendez

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

Dobromil Serwa (Contact Author)

National Bank of Poland ( email )

00-919 Warsaw
Poland

Warsaw School of Economics (SGH) ( email )

aleja Niepodleglosci 162
PL-Warsaw, 02-554
Poland

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