Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/97496
Authors: 
Aït-Sahalia, Yacine
Laeven, Roger J. A.
Pelizzon, Loriana
Year of Publication: 
2014
Series/Report no.: 
SAFE Working Paper Series 51
Abstract: 
We study self- and cross-excitation of shocks in the Eurozone sovereign CDS market. We adopt a multivariate setting with credit default intensities driven by mutually exciting jump processes, to capture the salient features observed in the data, in particular, the clustering of high default probabilities both in time (over days) and in space (across countries). The feedback between jump events and the intensity of these jumps is the key element of the model. We derive closed-form formulae for CDS prices, and estimate the model by matching theoretical prices to their empirical counterparts. We find evidence of self-excitation and asymmetric cross-excitation. Using impulse-response analysis, we assess the impact of shocks and a potential policy intervention not just on a single country under scrutiny but also, through the effect on cross-excitation risk which generates systemic sovereign risk, on other interconnected countries.
Subjects: 
CDS
Sovereign risk
Systemic risk
Jumps
Feedback
Hawkes processes
Mutually exciting processes
Impulse-response
JEL: 
C13
G12
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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