Template-Type: ReDIF-Article 1.0
Author-Name: Zalán Kocsis
Author-Email: kocsisz@mnb.hu
Author-Workplace-Name: Magyar Nemzeti Bank (central bank of Hungary)
Author-Name: Dénes Nagy
Author-Email: nadenkawai@gmail.com
Author-Workplace-Name: Széchenyi Tőkealap-kezelő Zrt. (Széchenyi Venture Capital Fund)
Title: Variance decomposition of sovereign CDS spreads
Abstract: In this paper we analyse the information content of correlations between daily changes in CDS spreads. Using factor analysis, we can break down the variance of CDS spreads into global, regional and country-specific components. Our results confirm the finding of other studies, namely that there is a strong global factor underlying credit risk spreads. Comparison of different time samples reveals that the global correlation of spreads has become stronger during the financial crisis; at present, the global factor universally affects emerging and developed countries. CDS spreads are most strongly correlated with other countries in geographically interpretable regional country groups. The Hungarian CDS spread generally follows the global factor; in recent years, the escalating crisis on the periphery of the euro area has also affected the country’s spreads. From the summer of 2010 until the end of the year, country-specific events led to a considerable deterioration in Hungary’s risk assessment. However, the shift in the government’s fiscal policy stance in early 2011 restored most of the lost investor confidence.
Classification-JEL: C38, F34, G15
Keywords: credit spreads, factor analysis, procrustes rotation

Journal: MNB Bulletin
Pages: 36-50
Volume: 6
Issue: 3
Year: 2011
Month: October
File-URL: http://www.mnb.hu/letoltes/kocsis-nagy-en.pdf
File-Format: Application/pdf

Handle: RePEc:mnb:bullet:v:6:y:2011:i:3:p:36-50