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

46 Pages Posted: 19 Aug 2015

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: September 10, 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 market implied measures of the probability of default (PD) and of the loss given default (LGD). We find that separate identification of PD and LGD appears empirically tractable for a numer of Euro area countries. In our empirical results the estimated market implied LGDs 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

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 (September 10, 2014). Available at SSRN: https://ssrn.com/abstract=2646561 or http://dx.doi.org/10.2139/ssrn.2646561

Gonzalo Camba-Mendez (Contact Author)

European Central Bank (ECB) ( email )

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

Dobromil Serwa

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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