Determinants of CDS in core and peripheral European countries: A comparative study during crisis and calm periods

The objective of this paper is twofold. First, it aims to investigate the nexus between sovereign CDS spreads and its drivers, including behavioral drivers, during the different states of the CDS market activity (bullish, bearish and normal). Second, it purposes to explore the heterogeneity in the response of CDS spreads through episodes of calm and turmoil. To this end, we utilize a rich data set on a sample of 12 European countries split into core and peripheral countries over the period ranging from 2007 January to 2022 January, that we split into three main periods, namely the debt period, the COVID-19 period and tranquil period, and employ the Quantile Panel Regression methodology. We find that while both country-specific and global risk factors play a significant role in shaping the dynamics of CDS spreads, their effects are spatially heterogenous and asymmetric depending on the CDS market state (bullish, bearish and normal). Additionally, the local investor sentiment is found to be an important factor shaping CDS spreads during crisis episodes. Our findings are robust and have many interesting policy implications.