Analysis of Dynamic Connectedness among Sovereign CDS Premia

This paper studies the dynamics of spillovers between sovereign Credit Default Swap (CDS) premia of nine countries, including Turkey, Russia, Brazil, South Africa, China, Germany, France, Italy and Spain. Weekly CDS data spans from July 2012 through June 2022. Adopting the methodology developed by Diebold & Yılmaz (2014), several connectedness measures are computed based on generalized forecast error variance decompositions generated through a time-varying parameter vector autoregressive model (TVP-VAR). The results show that the network’s connectedness level increased significantly during the COVID-19 outbreak and the Ukrainian war. Higher connectedness levels among European markets and developing countries are observed. Especially the connectedness levels between South Africa and other developing countries are remarkably high. The results reveal both fundamental-based and pure contagion channels and provide insight into the dynamic network of risk spillovers. A thorough understanding of international risk transmission channels is crucial for policy-makers and global investors regarding risk mitigation.