A Dynamic Analysis of the Determinants of the Greek Credit Default Swaps

Maria do Rosario CORREIA, Christian GOKUS, Andrew Hughes HALLETT, Christian R. RICHTER


Abstract. There is a consensus in finance literature that credit default swap spreads can be used to calculate the default probability of a government bond. The question is therefore what determines the credit default swap spreads and also what is a good indicator that predicts the future behaviour of this security spreads. In this paper, we investigate several variables which have been used in the past to predict the CDS spreads. We do this by analysing the behaviour of credit swaps spreads of Greek sovereign debt over the recent financial crisis. We take into account the changes on the data generating process as the crisis evolves. Moreover, we also investigate which part of the dynamic process of CDS spreads is explained by each possible determinant. In order to do so, we use a time-frequency approach. As it turns out, some determinants are better in explaining the short term behaviour of the CDS spreads whilst others explain the long term behaviour. We can also say by how many months one factor determines the behaviour of the CDS spreads for Greek sovereign debt. With this information we are able to determine the probability of default and what it depends upon..

Keywords. Eurozone crisis, Government default, Greek default, Credit default swap, Default probability.

JEL. C22, C58, G14, G15, H63, H68.


Eurozone Crisis, Government Default, Greek Default, Credit Default Swap, Default Probability

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DOI: http://dx.doi.org/10.1453/jepe.v3i2.811


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