The Causal Linkages between Sovereign CDS Prices for the BRICS and Major European Economies

Mikhail Stolbov

doi:10.5018/economics-ejournal.ja.2014-26

Mikhail Stolbov

Open Access

https://doi.org/10.5018/economics-ejournal.ja.2014-26

Copy DOI

Journal: Economics	Publication Date: Jun 27, 2014
Citations: 6	License type: CC BY 4.0

Affiliation: Moscow State Institute of International Relations

Abstract

Abstract The article examines causal relationships between sovereign credit default swaps (CDS) prices for the BRICS and most important EU economies (Germany, France, the UK, Italy, Spain) during the European debt crisis. The cross-correlation function (CCF) approach that distinguishes between causality-in-mean and causality-in-variance and the Breitung– Candelon causality test in the frequency domain are used in the research. Both tests reveal limited dependence of the BRICS CDS (especially, in the case of Brazil, China and South Africa) on the EU CDS prices. Thus, the paper underscores the signs of decoupling in the sovereign CDS market and also supports the view that the European debt crisis has so far had a limited non-EU impact in this market.

Highlights

The European debt crisis has reignited the public and scientific debate on financial contagion and spillovers
In this paper, based on the cross-correlation function (CCF) approach causal linkages between the BRICS and major EU economies in the sovereign credit default swaps (CDS) market are investigated after the outbreak of the European debt crisis
As these linkages approximate the transmission of sovereign credit risks, this analysis is intended to empirically assess the bilateral impact of the most important EU and emerging market (EM) economies

Summary

Introduction

The European debt crisis has reignited the public and scientific debate on financial contagion and spillovers. The overall degree of the BRICS exposure to the EU shocks remains insufficiently examined as other potentially important venues of instability propagation, e.g. sovereign debt market or interbank lending linkages have not received necessary attention. Such an analysis would be beneficial and timely due to an increasing systemic financial importance of emerging economies, in particular, that of China (Armijo et al 2014). Studying CDS prices appears to be instrumental in analyzing sovereign credit risks as CDS markets tend to be more liquid than those of the referenced sovereign bonds and disseminate market-wide information more rapidly (Forte and Peña 2009; Delis and Mylonidis 2011).

Relevant Literature Review

Econometric Methodology

Results and Discussion

Robustness Checks

Conclusions