On the sovereign debt crisis: sovereign credit default swaps and their interaction with stock market indices

Abstract

ABSTRACT This paper examines the European credit default swap spreads and their relationship to other financial assets such as stock indices. This study aims at better investigating the European sovereign debt crisis from the beginning of 2010 to the end of 2013. For this purpose, using daily data covering the period from January 2004 to December 2018, first we examine the impact of the sovereign crisis on spread sovereign credit default swaps, using both an asymmetric DCC-MGARCH model and a Copula-based Multivariate GARCH model (C-MGARCH). Then, we estimate the relations between spread sovereign credit default swaps and equity indices. We analyse in particular the lead–lag relationship between these two financial indicators by using a vector autoregressive model. We note a negative correlation between the spreads and stock market indices. There is a significant unidirectional causality from CDS spread changes to stock market indices returns. Our findings show that the CDS spreads have played a leading role in most European countries during this crisis. These results are potentially important because the current pandemic is threatening the economies of European countries, especially Greece.