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Abstract
In this paper, we analyze the dynamics of selected sovereign Central European credit default swap (hereinafter referred to as "sovereign CDS" or "sCDS") prices and investigate regional and European interdependencies among the economies under examination during the period 2008-2011. We focus our attention on the CDS market in Poland, the Czech Republic and Hungary, which are markets that researchers usually put into one "basket". The aim of our research is to verify to what extent the growth of the CDS premia in these countries during the period under study could be explained by the Hungarian and Greek crises. We apply stochastic volatility models with dynamic conditional correlation, including proxies for the Greek and Hungarian crises, in variance and correlation equations. On the basis of the obtained results, we conclude that regional dependencies between the Polish and Hungarian CDS prices are the strongest among all the analyzed pairs of countries. Both the Hungarian and Greek crises caused a rise in volatility in Central European countries. However, the shocks coming from the Greek market contributed to correlation growth between the Polish and Hungarian markets and, to a lesser extent, to the correlation of the Hungarian and Czech markets.
1. Introduction
The aim of the research was to investigate the dynamics of the Central European sovereign credit default swap (hereinafter referred to as "sCDS" or "sovereign CDS") price processes and to verify whether or not the prices of instruments are vulnerable to shifts in expectations, or in other words, whether sunspots play a role in determining the dynamics of these contracts. Additionally, we wanted to explore the causes of the enormous growth of premia in 2010, which in the case of Poland and the Czech Republic could not have been attributed to changes of fundamentals.
Sovereign CDS contracts attracted special attention of researchers from the outbreak of the recent financial crisis. However, most research is concentrated on the Eurozone (e.g. Calice et al., 2013a; Alter and Schüler, 2012) or on the Medi- terranean region (e.g. Atrissi and Mezher, 2010; Aizenman et al., 2013), treating Central Europe marginally or neglecting it-see, for example, Gentile and Giordano (2012) as well as Broto and Peres-Quiros (2013).
Afonso et al. (2012) carried out an event-study analysis to check the reaction...