Abstract
We analyse relationship between Lithuanian sovereign credit risk and equity market. The aim of the paper is to find the impact of the sovereign credit risk, which is expressed in the terms of Credit Default Swaps (CDS), on the movements of stocks prices of Lithuania. We use VAR (vector autoregression) model in order to find the relationship between Lithuanian CDS spread and OMX Vilnius index. We use impulse reaction method to investigate the impact of CDS spreads on the OMX Vilnius index. After analysis of equity index OMX Vilnius and Lithuanian CDS price relationship it was found out that there exists an opposite relationship between these two variables. When the CDS prices are rising, the equity prices decrease and vice versa. The main finding is that Lithuanian capital market returns reacts immediately to the changes of credit risk of Lithuania which is set by the global capital market and expressed by the CDS prices and Lithuanian capital market is under the great foreign pressure.
Highlights
The movements of capital market affect the economy and wealth-being of individuals worldwide
The aim of the paper is to find the impact of the sovereign credit risk, which is expressed in the terms of Credit Default Swaps (CDS), on the movements of stocks prices of Lithuania
We use VAR model in order to find the relationship between Lithuanian CDS spread and OMX Vilnius index
Summary
The movements of capital market affect the economy and wealth-being of individuals worldwide. The volatility of the sovereign credit risk of the country, where the company is located is one of the factors which has a strong impact on the prices of the shares
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