The impact of distressed economies on the EU sovereign market Articles uri icon

publication date

  • July 2013

start page

  • 2520

end page

  • 2523


  • 7


  • 37

International Standard Serial Number (ISSN)

  • 0378-4266

Electronic International Standard Serial Number (EISSN)

  • 1872-6372


  • Financially distressed economies inside the European Union (EU) are being blamed for producing a general increase in borrowing costs. This article analyzes the channels of default risk transmission within the EU
    countries using the information content in the sovereign Credit Default
    Swap (CDS) market. We proceed in two directions. First, we test the
    existence of cross-border volatility effects between the central and the
    peripheral EU countries. Second, we explore the effect of distressed
    economies on the default and risk premium constituents of sovereign
    default swaps. We show a significant volatility spillover from
    distressed to central European Economic and Monetary Union (EMU)
    economies. This causality pattern leads to a significant impact on the
    default swap risk premia. On average, the risk premium accounts for
    approximately 42% of central EMU spreads and 56% of the spreads for
    those countries outside of the EMU. The peripheral risk also affects the
    default component of central economies, although its impact is lower.


  • sovereign cds; volatility transmission; default risk premium; jel classification: g01; f34