Dynamic Connectedness between European Credit Default Swap Premia

Proceedings of The 3rd International Conference on New Trends in Management, Business and Economics

Year: 2022

DOI: https://www.doi.org/10.33422/3rd.icnmbe.2022.07.100


Dynamic Connectedness between European Credit Default Swap Premia

Özcan Ceylan



This study examines the spillover dynamics of Credit Default Swap (CDS) premia between four major European countries (Germany, France, Italy, and Spain) from 2012 to 2022. A rolling-window Vector Autoregressive (VAR) model is used. Original CDS data from each country contains 716 monthly observations, with the first 147 lost in the burn-in process of the rolling-window VAR model. Generalized forecast error variance decompositions are used to compute various connectedness measures that are independent of the ordering of the model variables. Results indicate that countries experiencing economic instability are more prone to be transmitters of shocks, and that total and pairwise connectedness levels vary significantly over the sample period. The study then regresses connectedness measures against the EUROSTOXX 50 Volatility Index (VSTOXX), the European equivalent of the Chicago Board of Exchange Volatility Index (VIX), and finds that variations in connectedness among CDS premia are positively related to the Europe-wide level of uncertainty. Shock transmissions are intensified around major events that heighten investor concerns.

keywords:comovement; European markets; financial instability; rolling-window Vector Autoregressive model; spillovers