The explanatory factors of sovereign Credit Default Swpas spreads: a quantile regression approach

abstract; introduction; litterature review; methodology and empirical analysis; results and discussion; conclusion

Abstract

This article aims to analyze the main risk factors that explain the manifestation and the aggravation of sovereign risk, particularly through the dynamics of sovereign CDS spreads in euro area member countries. The explanatory factors that will be analyzed are related to general risk aversion which is explained by the volatility of the stock markets, liquidity risk perceived by the flight to quality phenomenon, idiosyncratic risk which is explained by the deterioration of the state of macroeconomic fundamentals. We will adopt an econometric approach with the quantile regression method applied to panel data developed by Canay (2011), because it allows to estimate the effect of the independent variables on the different regions of the distribution, of the dependent variable and also make it possible to overcome the problem of the presence of extreme values. Finally, our model has made it possible to identify, over time and different countries, the factors which significantly explain a sovereign risk and whose deteriorated situation is likely to lead to payment defaults, very important to know especially in the current unfavorable macroeconomic context. These include the volatility of the stock markets which shows investor mistrust, the drying up of liquidity in the bond markets which explains a phenomenon of flight to quality, the budgetary factor which is explained by the unsustainable debt, the economic factor perceived by the level of wealth of a country.