SOVEREIGN CREDIT DEFAULT SWAPS – DEFINITION, SIGNIFICATION AND DETERMINANTS

Maria Paskaleva

Abstract


The current study observes the following European countries: France, Germany, the United Kingdom, Belgium, Bulgaria, Romania, Greece, Portugal, Ireland, Italy and Spain. The explored time period covers 2003-2016. The OLS regression model with a dummy variable is used. Despite the similarities in the dynamics of the sovereign CDS spreads of EU Member States, there is a distinction between the explored derivative markets according to their euro area membership - pursuing an autonomous monetary policy. The analysis of the macroeconomic determinants of the sovereign CDS reveals the existence of the following relationship: a common factor for the explored economies minimizes the probability of default and financial crisis. This factor is the presence of stable capital markets. This dependence is compounded by the strong importance of debt levels of Greece, Italy, Spain, Portugal and Ireland and the strong role of the bank system stability for Bulgaria and Romania. Based on this dependency, evidence for the presence of the “CDS paradox” phenomenon is presented, namely, CDS is a credit derivative that further creates, accumulates and introduces risk in the financial system.

Keywords


default swaps, financial derivatives

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