Interdependencies across Sovereign Bond Credit Default Swap Markets

This paper investigates the dependence structures between sovereign credit default swap (CDS) spreads of fifteen countries for the period of January 2005-July 2015. We employ copula approach to conduct this analysis as it enables us to analyze dependence structure separately from univariate characteristics of the series and to model a richer dependence structure by utilizing a broad range of distribution functions. Our results demonstrate that dependence structures are similar among majority of the pairs and in most of the countries lower and upper tail dependencies show similar behavior. This result contradicts with the findings that asset prices tend to move together more during times of negative shocks. The second finding of the paper is that sovereign CDS spreads, adjusted for global risk aversion, show positive dependence for all country pairs yet with varying degrees. There are country groups showing high average and tail dependence. Dependence between most of the emerging markets is found to be high on average yet it is low between emerging market and advance economies. We argue that similarities in credit quality gauged by credit ratings and carry trade returns of international investors may lead to the observed interdependence structures of CDS spreads.