Risk Transmission Between Sovereign Credit Default Swaps and Government Bonds During the Global Financial Crisis. The Case of the Czech Republic, Hungary and Poland

Abstract

The goal of the paper is to verify the direction of sovereign risk transmission
between sovereign CDS and sovereign bond markets in the Central European
economies: the Czech Republic, Hungary and Poland. We focus on the hectic
crisis period of 2008-2013. On the one hand, the sCDS market is said to react
faster to the news than the sovereign bonds market. On the other hand, the
bond market is related more closely to the internal situation of the country than
the sCDS one and thus can price the sovereign risk more accurate. Moreover,
the relationships between the markets can change during crisis time. We find
that in the case of most risky and most indebted economy in Hungary there
was a feedback between sCDS and sovereign bonds risk. In the case of Poland
sCDS market risk Granger caused the risk of sovereign bonds – if we exclude
instantaneous causality from the analysis; when it is included, feedback occurred.
Eventually, in the case of the Czech Republic the risk of sCDS market Granger
caused risk of the bonds market.