Systemic risk spillovers in sovereign credit default swaps in Europe: a spatial approach. Issue 2 (March 2018)

• Record Type: Journal Article
• Authors: Mili, Mehdi
• Is Part Of: Journal of asset management. Volume 19:Issue 2(2018)
• Page Start: 133
• Page End: 143
• Publication Date: 2018-03
• Subjects: Systemic risk -- Financial contagion -- Spatial regression -- CDS returns -- C21 -- G12 -- G18 -- G21; Business enterprises -- Finance -- Periodicals; 658.15242
• DOI: 10.1057/s41260-017-0068-1
• Languages: English
• ISSNs: 1470-8272

Abstract

Abstract This paper explores systemic risk spillovers between sovereign credit default swaps (CDS) returns in Europe during the period 2006–2016. We model spillovers using a spatial regression approach that allows us to analyze the effects of the movements of CDS returns in terms of spillovers and externalities. The spatial model decomposes the CDS returns into a systemic, systematic and idiosyncratic risk premium. We perform also stress testing to capture the impact of extreme events on CDS portfolios. Our results reveal significant impact of systemic risk spillover on sovereign CDS in Europe. Using Monte Carlo simulation, we show that spillovers between CDS markets increase the risk of CDS portfolios and the risk increases for high spatial interconnectivity between sovereign markets.