The Anatomy of Sovereign Credit Contagion

44 Pages Posted: 14 Jul 2015

See all articles by Elena Kalotychou

Elena Kalotychou

Cass Business School, City, University of London

Eli M. Remolona

Bank for International Settlements (BIS) - Monetary and Economic Department

Eliza Wu

The University of Sydney - Business School; Financial Research Network (FIRN)

Date Written: April 30, 2015

Abstract

We analyze the channels for the cross-border propagation of sovereign credit risk in the international sovereign debt market. We study sovereign credit contagion through the immediate effects of credit events as defined by CDS spread jumps on the credit spreads of other regional sovereigns and on the rest of the world. We find that such “fast and furious” contagion has been primarily a regional phenomenon, however, a global “slow-burn” spillover of credit events was also in force during the recent European debt crisis. We are able to model the protracted spillover mechanism through the effects of identified sovereign credit events on a global sovereign risk factor and time varying country-specific factor loadings.

Keywords: sovereign risk, credit event, contagion, spillover, credit default swap, debt crisis, global factor

JEL Classification: G15, F30, F31

Suggested Citation

Kalotychou, Elena and Remolona, Eli M. and Wu, Eliza, The Anatomy of Sovereign Credit Contagion (April 30, 2015). Available at SSRN: https://ssrn.com/abstract=2630582 or http://dx.doi.org/10.2139/ssrn.2630582

Elena Kalotychou

Cass Business School, City, University of London ( email )

106 Bunhill Row
London, EC1Y 8TZ
Great Britain

Eli M. Remolona

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

IFC 2 Bldg, 78/F
Central
Hong Kong
Hong Kong
+852 2982 7150 (Phone)
+852 2982 7123 (Fax)

Eliza Wu (Contact Author)

The University of Sydney - Business School ( email )

University of Sydney
Darlington
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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