Abstract
This research proposes a Bayesian multivariate stochastic volatility (MSV) model to analyze the dynamics of sovereign risk in eurozone CDS markets during the recent financial crisis. We follow an MCMC approach to parameters and latent variable estimation and provide evidence of significant volatility shifts in asset returns, strong simultaneous increases in cross-market correlations, as well as sharp declines in correlations patterns. Overall, these findings are highly consistent with various empirical characterizations of contagion put forward in the literature, allowing us to conclude that the recent financial crisis generated severe contagion effects in sovereign debt markets of eurozone countries.
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Acknowledgements
Research supported by funding from the European Union, 7th Framework Programme FP7/2007-2013, grant agreement SYRTO-SSH-2012-320270, and by the Italian Ministry of Education, MIUR, PRIN 2010-11 grant MISURA.
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Casarin, R., Tronzano, M., Sartore, D. (2015). Sovereign Risk and Contagion Effects in the Eurozone: A Bayesian Stochastic Correlation Model. In: Morlini, I., Minerva, T., Vichi, M. (eds) Advances in Statistical Models for Data Analysis. Studies in Classification, Data Analysis, and Knowledge Organization. Springer, Cham. https://doi.org/10.1007/978-3-319-17377-1_4
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DOI: https://doi.org/10.1007/978-3-319-17377-1_4
Publisher Name: Springer, Cham
Print ISBN: 978-3-319-17376-4
Online ISBN: 978-3-319-17377-1
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