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Market perception of sovereign credit risk in the euro area during the financial crisis

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  • Gonzalo Camba-Méndez
  • Dobromił Serwa

Abstract

We study market perception of sovereign credit risk in the euro area during the financial crisis. In our analysis we use a parsimonious CDS pricing model to estimate market implied measures of the probability of default (PD) and of the loss given default (LGD). We find that separate identification of PD and LGD appears empirically tractable for a number of euro area countries. In our empirical results the estimated market implied LGDs stay comfortably below 40% in most of the samples. We also find that macroeconomic and institutional developments were only weakly correlated with the market perception of sovereign credit risk, whereas financial contagion appears to have exerted a non-negligible effect.

Suggested Citation

  • Gonzalo Camba-Méndez & Dobromił Serwa, 2014. "Market perception of sovereign credit risk in the euro area during the financial crisis," NBP Working Papers 185, Narodowy Bank Polski.
    • Handle: RePEc:nbp:nbpmis:185
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    Cited by:

    1. Zaghini, Andrea, 2016. "Fragmentation and heterogeneity in the euro-area corporate bond market: Back to normal?," Journal of Financial Stability, Elsevier, vol. 23(C), pages 51-61.
    2. Camba-Méndez, Gonzalo & Serwa, Dobromił, 2016. "Market perception of sovereign credit risk in the euro area during the financial crisis," The North American Journal of Economics and Finance, Elsevier, vol. 37(C), pages 168-189.
    3. Blot, Christophe & Ducoudré, Bruno & Timbeau, Xavier, 2016. "Sovereign debt spread and default in a model with self-fulfilling prophecies and asymmetric information," Journal of Macroeconomics, Elsevier, vol. 47(PB), pages 281-299.
    4. Michel Aglietta & Xavier Ragot, 2015. "Érosion du tissu productif en France. Causes et remèdes," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(6), pages 95-150.
    5. Belke, Ansgar & Gros, Daniel, 2021. "QE in the euro area: Has the PSPP benefited peripheral bonds?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 73(C).
    6. Belke, Ansgar & Gros, Daniel, 2019. "QE in the euro area: Has the PSPP benefited peripheral bonds?," Ruhr Economic Papers 803, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    7. Ribeiro, Pedro Pires & Cermeño, Rodolfo & Curto, José Dias, 2017. "Sovereign bond markets and financial volatility dynamics: Panel-GARCH evidence for six euro area countries," Finance Research Letters, Elsevier, vol. 21(C), pages 107-114.
    8. Serhan Cevik & Belma Öztürkkal, 2021. "Contagion of fear: Is the impact of COVID‐19 on sovereign risk really indiscriminate?," International Finance, Wiley Blackwell, vol. 24(2), pages 134-154, August.
    9. Gonzalo Camba-Méndez & Konrad Kostrzewa & Anna Mospan & Dobromił Serwa, 2014. "Pricing sovereign credit risk of an emerging market," NBP Working Papers 189, Narodowy Bank Polski.
    10. Montes, Gabriel Caldas & Souza, Ivan, 2020. "Sovereign default risk, debt uncertainty and fiscal credibility: The case of Brazil," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    11. Jung Park, Yuen & Kutan, Ali M. & Ryu, Doojin, 2019. "The impacts of overseas market shocks on the CDS-option basis," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 622-636.
    12. repec:hal:spmain:info:hdl:2441/5bhbhfsmhj981b00go8c6saind is not listed on IDEAS
    13. Giudice, Gabriele & de Manuel Aramendía, Mirzha & Kontolemis, Zenon & Monteiro, Daniel P., 2019. "A European safe asset to complement national government bonds," MPRA Paper 95748, University Library of Munich, Germany.
    14. Rodríguez-López, Araceli & Fernández-Abascal, Hermenegildo & Maté-García, Jorge-Julio & Rodríguez-Fernández, José-Miguel & Rojo-García, José-Luis & Sanz-Gómez, José-Antonio, 2021. "Evaluating Euribor Manipulation: Effects on Mortgage Borrowers," Finance Research Letters, Elsevier, vol. 40(C).
    15. repec:spo:wpmain:info:hdl:2441/5bhbhfsmhj981b00go8c6saind is not listed on IDEAS
    16. Maria Czech, 2022. "The Impact of Covid-19 Dynamics on SCDS Spreads in Selected CEE Countries," European Research Studies Journal, European Research Studies Journal, vol. 0(1), pages 254-271.

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    More about this item

    Keywords

    sovereign credit risk; CDS spreads; euro area; probability of default; loss given default;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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