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We develop a theoretical and empirical framework for the connections between global financial and sovereign CDS markets. The transmission of shocks is shown to affect the systemic default probability of… Click to show full abstract
We develop a theoretical and empirical framework for the connections between global financial and sovereign CDS markets. The transmission of shocks is shown to affect the systemic default probability of the international network. The network is found to be "robust but fragile", meaning that a shock can result in the propagation of crises. Between 2003 and 2013, the probability of default in the network in the face of potentially poor investment outcomes and/or sovereign bond haircuts changes sub-stantially. The results suggest that it is the interconnectedness of the financial and sovereign debt markets that provides increased protection against financial fragility.
Journal Title: Journal of International Financial Markets, Institutions and Money
Year Published: 2019
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