Contagion risk in african sovereign debt markets: A spatial econometrics approach

Abstract

This study applies the spatial Durbin model to analyse the extent to which international trade and geographical proximity affect the stability of African sovereign-debt markets. Using sovereign credit default swap spreads, our empirical findings show that it is not only a country's macroeconomic fundamentals that influence its likelihood of default but also contagion from other countries. Trade linkages are found to be a strong transmission channel for contagion risk, especially among countries that trade heavily. A decomposition of the results demonstrates that at least 60% of the variation in credit default swap spread changes is attributed to spillovers through the trading channel. A change in the weighting matrix to geographical proximity confirms the baseline findings that an African country's debt market is susceptible to macroeconomic events in other countries.