Abstract
The paper analyses development of the Baltic sovereign CDS market. The level of commonalities and differences in credit risk of the Baltic countries with regard to CDS spreads is investigated. We apply principal component analysis, regression analysis, correlation analysis methods and Granger causality test. Driving forces for changes of CDS spreads in the individual country are established. We discover that the main impact of CDS spread changes arrives from external sources. Our study reveals interdependence between CDS spreads of the Baltic countries and analyses a contagion effect of the change of CDS spreads.
Highlights
The Baltic countries – Estonia, Latvia and Lithuania – declared their independence in 1990
We investigate the level of commonalities and differences in credit risk of the Baltic countries in terms of Credit Default Swap (CDS) spreads
3 In our analysis we focus on CDS spread changes rather than on CDS spreads, because CDS spread changes of the Baltic countries were sta tionary during the period analysed
Summary
The Baltic countries – Estonia, Latvia and Lithuania – declared their independence in 1990. Estonia follows consolidated fiscal policy and the sovereign debt of the country is the lowest in the EU1, whereas Latvia and Lithuania run a budget deficit. Since the bankruptcy of Lehman Brothers, the credit risk of sovereigns has attracted particular attention. The aim of the article is to analyse sovereign CDS market of the Baltic countries from September 2008 to December 2013. The analysis of CDS spreads allows to some extent to study the credit risk of the countries. We investigate the level of commonalities and differences in credit risk of the Baltic countries in terms of CDS spreads.
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