Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2011-12-13
Revision-Date: 2012-06-28
Number: 11-176/2/DSF29
Author-Name: Xin Zhang
Author-Workplace-Name: VU University Amsterdam
Author-Name: Bernd Schwaab
Author-Workplace-Name: European Central Bank
Author-Name: Andre Lucas
Author-Workplace-Name: VU University Amsterdam
Title: Conditional Probabilities and Contagion Measures for Euro Area Sovereign Default Risk
Abstract: We propose a novel empirical framework to assess the likelihood of joint and conditional failure for Euro area sovereigns. Our model is based on a dynamic skewed-t copulawhich captures all the salient features of the data, including skewed and heavy-tailed changes in the price of CDS protection against sovereign default, as well as dynamicvolatilities and correlations to ensure that failure dependence can increase in times of stress. We apply the framework to Euro area sovereign CDS spreads from 2008 tomid-2011. Our results reveal significant time-variation in risk dependence and considerable spill-over effects in the likelihood of sovereign failures. We also investigatedistress dependence around a key policy announcement by Euro area heads of state on May 9, 2010, and demonstrate the importance of capturing higher-order time-varyingmoments during times of crisis for the correct assessment of interacting risks.
Classification-JEL: C32, G32
Keywords: sovereign credit risk, higher order moments, time-varying parameters, financial stability
File-Url: https://papers.tinbergen.nl/11176.pdf
File-Format: application/pdf
File-Size: 1108405 bytes
Handle: RePEc:tin:wpaper:20110176