Do Credit Default Swaps Affect the Time-Varying Cointegration Between PIIGSs Sovereign Interest Rates?

This paper proposes a model for pricing credit derivatives in a defaultable HJM framework. The model features hump-shaped, level dependent, and unspanned stochastic volatility, and accommodates a correlation structure between the stochastic volatility, the default-free interest rates, and the credit spreads. The model is finite-dimensional, and leads (a) to exponentially affine default-free and defaultable bond prices, and (b) to an approximation for pricing credit default swaps and swaptions in terms of defaultable bond prices with varying maturities. A numerical study demonstrates that the model captures stylized various features of credit default swaps and swaptions.

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Two-level games and market constraints on politics in Europe

International Political Science Review ◽

10.1177/0192512120924032 ◽

2020 ◽

pp. 019251212092403

Author(s):

Iain McMenamin ◽

Michael Breen ◽

Juan Muñoz-Portillo

Keyword(s):

Content Analysis ◽

Financial Markets ◽

Interest Rates ◽

Macroeconomic Policy ◽

Credit Default Swaps ◽

Euro Crisis ◽

European Policy ◽

National Politics ◽

Market Responses ◽

Credit Default

Financial markets understood the Euro crisis as a two-level game. They monitored national politics as a source of both national and European policy. The incentives to conform to the market’s preference were weaker for creditor countries than for debtor countries because debtors were providers of their own macroeconomic policy, but each creditor was one of several contributing to bailouts. Worries about default caused investors to sell the bonds of debtors and thereby constrained debtors by raising interest rates. By contrast, if creditor behaviour reduced the probability of a bailout of debtors, the response again would be to sell assets linked to the debtor. The implication is that market responses to creditor elections should have been larger and more turbulent than reactions to debtor elections. We test this theory by analyzing credit default swaps of eleven countries around fifteen elections and conducting a content analysis of 3,126 reports from Bloomberg terminals.

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