What is it about?
Credit Default Swap (CDS) spread is a realistic measure of credit risk. Changes in the spreads showcase changes in the underlying uncertainty or credit volatility regarding the credit risk, associated with the asset class. We use Multifractal Detrended Fluctuation Analysis (MF-DFA) to further investigate the presence of asymmetries and the difference between Greece and G7 coun-tries in terms of credit risk. We have considered 2587 daily observations for each of the 48 CDS spreads. Hence, a total of 124,176 data points were under consideration across six yearly CDS categories of Greece and most of the G7 countries (Germany, USA, UK, Canada, Japan). The tenure of these CDS were 1 year, 2 years, 3 years, 5 years, 7 years, 10 years, 20 years, and 30 years. We have found that the Greek CDS spread movement is purely stochastic and anti-persistent, having practically no predictability at all. On the other hand, the remaining countries’ CDSs were highly predictable, showing a consistent long memory or long-range dependence, having embedded the bubble caused by herding. This is reflected in terms of flight-to-quality behavior and in estimates of CDS premiums for insurance against a default on government bonds
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Why is it important?
This research contributes to the existing literature in two ways. Firstly, this study is one of the first to address the presence of asymmetries in sovereign risk pluralistic inves-tigation of CDS spreads between the spreads of Greece and most of the G7 countries’ (Germany, USA, UK, Canada, Japan) CDS during a very volatile period using multifractal detrended fluctuation analysis (MF-DFA) to find herding, bubble, and long memory traits. Secondly, unlike several earlier studies focused on the CDS spreads, the current study in-vestigates a variety of tenures of these CDSs (1 year, 2 years, 3 years, 5 years, 7 years, 10 years, 20 years, and 30 years).
Perspectives
Motivated by the rapid widening of CDS spreads, we seek to answer three main re-search questions: (1) Why did investors make a discrimination between the asset-classes of developed countries (Germany, USA, UK, Canada, Japan) and emerging countries (Greece), providing a distinct indication of flight-to-quality behavior? (2) Are developed countries (Germany, USA, UK, Canada, Japan) and Greek CDSs highly predictable? (3) Do the countries examined and Greece’s CDSs follow the same pattern during the Greek debt crisis?
Dr Spyros Papathanasiou
National and Kapodistrian University of Athens
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This page is a summary of: Cross-Country Linkages and Asymmetries of Sovereign Risk Pluralistic Investigation of CDS Spreads, Sustainability, October 2022, MDPI AG,
DOI: 10.3390/su142114056.
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