A study on Co-movements and Contagion in Asian Sovereign CDS Markets
Daehyoung Cho
Kyongwook Choi
This paper examines the interconnectedness and the contagion effect of default risk in Asian sovereign CDS markets since the global financial crisis. Using the dynamic conditional correlation analysis, we find the significant co-movements in Asian sovereign CDS markets, which are not only larger among developing countries rather than between developed and developing countries but intra-regional nature is stronger than inter-regional. The Spillover Index model results show the contagion probability of sovereign default risk in Asian CDS markets. Especially, we provide evidence of the contagion effect among asian 6 countries except Japan, and these countries are affected by cross-market spillovers more than by own-market spillovers. In addition, the rolling sample analysis reveals that the contagion in Asian sovereign CDS markets was expanded during extreme economic and financial episodes such as Lehman Brothers bankruptcy, European financial crisis, and the U.S. credit downgrade.
Sovereign Credit Default Swap,Co-movement,Dynamic Conditional Correlation,Generalized Variance Decomposition,Spillover Index