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Cross-Country Linkages and Asymmetries of Sovereign Risk Pluralistic Investigation of CDS Spreads

Author

Listed:
  • Bikramaditya Ghosh

    (Symbiosis Institute of Business Management, Symbiosis International (Deemed University), Electronic City, Bengaluru 560100, India)

  • Spyros Papathanasiou

    (Department of Economics, School of Economics and Political Sciences, National and Kapodistrian University of Athens, 1 Sofokleous Street, 10559 Athens, Greece)

  • Dimitrios Kenourgios

    (Department of Economics, School of Economics and Political Sciences, National and Kapodistrian University of Athens, 1 Sofokleous Street, 10559 Athens, Greece)

Abstract

Credit Default Swap (CDS) spread is a realistic measure of credit risk. Changes in the spreads showcase changes in the underlying uncertainty or credit volatility regarding the credit risk, associated with the asset class. We use Multifractal Detrended Fluctuation Analysis (MF-DFA) to further investigate the presence of asymmetries and the difference between Greece and G7 countries in terms of credit risk. We have considered 2587 daily observations for each of the 48 CDS spreads. Hence, a total of 124,176 data points were under consideration across six yearly CDS categories of Greece and most of the G7 countries (Germany, USA, UK, Canada, Japan). The tenure of these CDS were 1 year, 2 years, 3 years, 5 years, 7 years, 10 years, 20 years, and 30 years. We have found that the Greek CDS spread movement is purely stochastic and anti-persistent, having practically no predictability at all. On the other hand, the remaining countries’ CDSs were highly predictable, showing a consistent long memory or long-range dependence, having embedded the bubble caused by herding. This is reflected in terms of flight-to-quality behavior and in estimates of CDS premiums for insurance against a default on government bonds.

Suggested Citation

  • Bikramaditya Ghosh & Spyros Papathanasiou & Dimitrios Kenourgios, 2022. "Cross-Country Linkages and Asymmetries of Sovereign Risk Pluralistic Investigation of CDS Spreads," Sustainability, MDPI, vol. 14(21), pages 1-10, October.
    • Handle: RePEc:gam:jsusta:v:14:y:2022:i:21:p:14056-:d:956758
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