Conditional Euro Area Sovereign Default Risk

Riksbank Research Paper Series No. 100

Sveriges Riksbank Working Paper Series No. 269

40 Pages Posted: 15 Aug 2013

See all articles by Andre Lucas

Andre Lucas

Vrije Universiteit Amsterdam; Tinbergen Institute

Bernd Schwaab

European Central Bank (ECB) - Directorate General Research

Xin Zhang

Sveriges Riksbank - Research Division; BIS Innovation Hub

Date Written: May 1, 2013

Abstract

We propose an empirical framework to assess the likelihood of joint and conditional sovereign default from observed CDS prices. Our model is based on a dynamic skewed-t distribution that captures all salient features of the data, including skewed and heavytailed changes in the price of CDS protection against sovereign default, as well as dynamic volatilities and correlations that ensure that uncertainty and risk dependence can increase in times of stress. We apply the framework to euro area sovereign CDS spreads during the euro area debt crisis. Our results reveal significant time-variation in distress dependence and spill-over effects for sovereign default risk. We investigate market perceptions of joint and conditional sovereign risk around announcements of Eurosystem asset purchases programs, and document a strong impact on joint risk.

Keywords: sovereign credit risk, higher order moments, time-varying parameters, financial stability

JEL Classification: C32, G32

Suggested Citation

Lucas, Andre and Schwaab, Bernd and Zhang, Xin (Kelvin), Conditional Euro Area Sovereign Default Risk (May 1, 2013). Riksbank Research Paper Series No. 100, Sveriges Riksbank Working Paper Series No. 269, Available at SSRN: https://ssrn.com/abstract=2286654 or http://dx.doi.org/10.2139/ssrn.2286654

Andre Lucas

Vrije Universiteit Amsterdam ( email )

SBE/EDS, De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31 20 598 6039 (Phone)
+31 20 598 6020 (Fax)

HOME PAGE: http://personal.vu.nl/a.lucas

Tinbergen Institute

Roetersstraat 31
Amsterdam, 1018 WB
Netherlands

HOME PAGE: http://www.tinbergen.nl

Bernd Schwaab

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Xin (Kelvin) Zhang (Contact Author)

Sveriges Riksbank - Research Division ( email )

S-103 37 Stockholm
Sweden

BIS Innovation Hub

Mäster Samuelsgatan 36
Stockholm, 111 57
Sweden

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
101
Abstract Views
1,433
Rank
476,054
PlumX Metrics