https://orcid.org/0000-0003-1441-109X
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Pelin Akçagün-Narin, Süleyman Taşpınar, Osman Doğan, A spatial analysis of contagion in sovereign credit default swaps, Journal of Financial Econometrics, Volume 23, Issue 3, 2025, nbaf011, https://doi.org/10.1093/jjfinec/nbaf011
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Abstract
In this article, we propose a spatio-temporal model to investigate the dynamics of contagion in the credit event risks of sovereigns. More specifically, we examine how changes in the credit default swap (CDS) spreads of a sovereign are influenced by the CDS spreads of other sovereigns over time. Our model incorporates spatial, temporal, and spatio-temporal lags of CDS spreads while accounting for unobserved heterogeneity across sovereigns and time periods. We consider several candidates for the underlying contagion network matrix using cross-border domestic bank exposures, geographical distances between sovereigns, and pairwise correlations of CDS spreads. We propose an efficient Bayesian algorithm for estimation and a simple method to address nested and non-nested model selection problems. Using a quarterly dataset of fourteen sovereigns from 2009 to 2022, we find evidence of contagion in CDS spreads which was relatively stronger during the period 2009–2012.
