Forecasting the spreads of bond yields using the credit default swaps during the financial crisis
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Δημητρόπουλος, Βασίλειος
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Abstract
This thesis copes with the main factors of credit risk and its relation to investors’ expectations, as well as the possible existence of investors' expectations regarding the transmission channel of the ECB's contractual and unconventional monetary position. In introduction, we state the major procedures that marked the recent period of turmoil in the global financial markets.
The second chapter discusses the credit risk valuation to study the determinants of CDS exchange rate developments for euro area countries and the possible transmission impacts of peripheral countries to core countries after the recent recession in the EU. To examine this, it is applied a model with the traditional advantages of VAR modelling and the benefits of a panel data
approach which is the PVAR (Panel Vector Autoregressive model). Besides that, the analysis uses factors that proxy determinants for behavioral as well as proxy determinants for financial and global market spread. The major results shows that, after the financial crisis through different countries and periods, the CDS variable determinants presents neither stable nor uniform. For example, as we go through the period 2012 to 2018, the impact of the slope of term structure in the sovereign CDS spread variance is increasing for the peripheral countries (Greece, Ireland, Italy, Portugal and Spain) and for the core countries is decreasing (Austria, Belgium, France, Germany and the Netherlands). In addition, we indicate that the impacts of transmission after the recent financial crisis run from Portugal and Italy economies to the core countries, since effects from Greece, Spain and Ireland are of minor importance. Italy, being one of the largest economy in EU could potential disrupt the Eurozone area; although the probability of financial difficulty is
perceived by the markets as being relatively smaller, based on sovereign CDS spreadsThe third chapter, for the first time, copes with the proof of the monetary policy shocks of ECB about the financial expectations in Eurozone area after the financial crisis in EU. The results
present that the unconventional monetary policy of ECB has a positive impact on sentiment and expectations. In addition, the outcomes from the analysis indicate that the ECB's conventional monetary policy takes a positive and important impact on EU sentiment and expectations for the peripheral countries, since the conventional monetary policy of ECB contributes significantly to
variance of peripheral European countries, and more specific after the US and Euro area economic crisis. It should be noticed that, after the Eurozone crisis, the conventional monetary policy stance of ECB seems to be the most significant net sender of effects to the peripheral countries of the EU, since for the core countries is the second significant receiver. The ESI is the following in
significance net sender of impacts of the system for the core countries. The findings end up with the significance of conventional monetary policy in identifying financial expectations.
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Keywords
Forecasting spreads, Credit default swap, Financial crisis