Impacts of the financial crisis on eurozone sovereign CDS spreads

We study the variation of sovereign credit default swaps (CDSs) of eurozone countries, their persistence and co-movements, with particular attention given to the impact of the financial crisis. Specifically, using a dual fractional integration model, we test the evidence of long memory for CDSs of ten eurozone countries. Our analysis reveals that price discovery processes satisfy the minimum requirements for a weak form of efficiency for sovereign CDS markets, even during the crisis. In contrast, we document the spreading out of persistent CDS uncertainty among the peripheral economies with its outbreak. We provide evidence that CDS uncertainty has implications for the pricing of sovereign risk including that of core countries in the crisis period. Finally, we present the potential spillover effects utilizing a dynamic conditional correlation model and show that, with the collapse of Lehman, the probability of a contagion increased across all countries and became more explicit for peripheral economies as the sovereign crisis took on a new dimension.