Decomposition of Sovereign CDS Spread using the Concept of Factorization

Rumiana Górska



Sovereign CDS (Credit Default Swap) is a derivative that provides insurance of repayment of the government’s loans and may be considered as a market indicator of the insolvency risk of a country. The aim of the study is to identify factors affecting the sovereign CDS spreads of selected European countries for the period from 2008 to 2016. Factor analysis shows that there are two common factors that have explained about 93% of the variation of the CDS spreads. Next, the decomposition of the spreads presents the influence of these factors on CDS spreads of surveyed countries.


CDS spread; factor analysis; global risk; insolvency risk

Full Text:



Aizenman, J., Hutchison, M., Jinjarak, Y. (2013), What is the Risk of European Sovereign Debt Defaults? Fiscal Space, CDS Spreads and Market Pricing of Risk, Journal of International Money and Finance. Apr2013, Vol. 34, 37-59.

Arce, O., Mayordomo, S., Peña, J. (2013), Credit-Risk Valuation in the Sovereign CDS and bonds Markets: Evidence from the Euro Area Crisis, Journal of International Money and Finance. Jun2013, Vol. 35, 124-145.

Badaoui, S., Cathcart, L., El-Jahel, L. (2013), Do Sovereign Credit Default Swaps Represent a Clean Measure of Sovereign Default Risk? A Factor Model Approach, Journal of Ban-ing and Finance. Jul2013, Vol. 37 Issue 7, 2392-2407.

Bieńkowski, W., Gawrońska-Nowak, B., Grabowski, W. (2011) Podatność polskich rynków finansowych na niestabilności wewnętrzne i zewnętrzne, Materiały i Studia NBP. Zeszyt nr 258, NBP. (The Vulnerability of Polish Financial Markets to Internal and External Instabilities, Materials and Studies of the National Bank of Poland. No. 258, NBP.)

Büchel, K. (2013), Do Words Matter? The Impact of Communication on the PIIGS' CDS and Bond Yield Spreads during Europe's Sovereign Debt Crisis, European Journal of Political Economy. Dec2013, Vol. 32, 412-431, DOI: 10.1016/j.ejpoleco.2013.08.004.

Coronado, M., Corzo, T., Lazcano, L. (2012), A Case for Europe: the Relationship between Sovereign CDS and Stock Indexes, Frontiers in Finance and Economics. Oct2012, Vol. 9 Issue 2, 32-63.

Coudert, V., Gex, M. (2013), The Interactions between the Credit Default Swap and the Bond Markets in Financial Turmoil, Review of International Economics. Aug2013, Vol. 21 Issue 3, 492-505.

Fabozzi, F. J., Giacometti, R., Tsuchida, N. (2016), Factor Decomposition of the Eurozone Sovereign CDS Spreads, Journal of International Money and Finance, Elsevier, vol. 65(C), 1-23, DOI: 10.1016/j.jimonfin.2016.03.003.

Ho, T. S. Y. (1990), Strategic Fixed Income Investment, Dow Jones-Irwing Homewood, Illinois

Kalbaska, A., Gątkowski, M. (2012), Eurozone sovereign contagion: Evidence from the CDS market (2005–2010), Journal of Economic Behavior and Organization. Aug2012, Vol. 83 Issue 3, 657-673.

Kliber, A. (2011), Sovereign CDS Instruments in Central Europe - Linkages and Interdependence, Dynamic Econometric Models 11, 111-128.

Komarek, L. Komarkova, Z., Lesanovska, J., (2013) Analysis of Sovereign Risk Market Indicators: The Case of the Czech Republic, Czech Journal of Economics and Finance. Jan2013, Vol. 63 Issue 1, 5-24.

Varga, L. (2008), The Information Content of Hungarian Sovereign CDS Spreads. MNB Occasional Papers. Dec2008, Issue 78, 9-24.

ISSN (print) 1234-3862
ISSN (online) 2450-7067

Partnerzy platformy czasopism