Sovereign Credit Default Swap and Stock Markets in Central and Eastern European Countries: Are Feedback Effects at Work?

The purpose of the paper is to investigate the relationship between sovereign Credit Default Swap (CDS) and stock markets in nine emerging economies from Central and Eastern Europe (CEE), using daily data over the period January 2008–April 2018. The analysis deploys a Vector Autoregressive model, fo...

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Bibliographic Details
Published in:Entropy (Basel, Switzerland) Switzerland), 2020-03, Vol.22 (3), p.338
Main Authors: Anton, Sorin Gabriel, Afloarei Nucu, Anca Elena
Format: Article
Language:English
Subjects:
Autoregressive models
Bans
Causality
cee countries
credit default swap
Credit default swaps
Default
Economic conditions
Economic crisis
Emerging markets
Entropy
Equity
Feedback
International finance
Investments
Literature reviews
Risk management
Securities markets
Sovereign debt
Stock exchanges
stock market
vector autoregressive (var) model
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Summary:The purpose of the paper is to investigate the relationship between sovereign Credit Default Swap (CDS) and stock markets in nine emerging economies from Central and Eastern Europe (CEE), using daily data over the period January 2008–April 2018. The analysis deploys a Vector Autoregressive model, focusing on the direction of Granger causality between the credit and stock markets. We find evidence of the presence of bidirectional feedback between sovereign CDS and stock markets in CEE countries. The results highlight a transfer entropy of risk from the private to public sector over the whole period and respectively, from the public to private transfer entropy of risk during the European sovereign debt crisis only in Romania and Slovenia. Another finding that deserves particular attention is that the linkage between the CDS spreads and stock markets is time-varying and subject to regime shifts, depending on global financial conditions, such as the sovereign debt crisis. By providing insights on the inter-temporal causality of the comovements of the CDS–stock markets, the paper has significant practical implications for risk management practices and regulatory policies, under different market conditions of European emerging economies.
ISSN:1099-4300
1099-4300
DOI:10.3390/e22030338