Authors: Tarek Chebbi; Mounir Sarraj
Addresses: Faculty of Economic Sciences and Management of Sousse, University of Sousse, Tunisia ' Faculty of Economic Sciences and Management of Sousse, University of Sousse, Tunisia
Abstract: The purpose of this paper is to trace the impact of news announcements on sovereign five-year credit default swaps (CDS) spreads of four distressed countries in the euro area (Ireland, Italy, Portugal, and Spain) with daily data spanning the period May 17, 2012 to May 23, 2014. We apply an analysis based on asymmetric conditional volatility modelling methodology. The empirical analysis provides interesting evidences. The paper finds that the influence of country-specific news variable on the dynamics of the sovereign CDS spreads was confirmed. Moreover, when considering that news originated only from distressed countries, the domestic and cross-border effects of news are restricted to unfavourable news. In particular, we find that more bad news in one country leads to an increase in its own CDS spreads and those associated with other countries confirming thus the presence of a news spillover phenomenon. In contrast, we make evidence of the spillovers of good news from the non-distressed countries onto the other countries. Clearly, the sovereign CDS markets' responses indicate that the split into bad and good news has largely been done correctly.
Keywords: news announcements; CDS spreads; euro area countries; bad news; good news.
International Journal of Bonds and Derivatives, 2017 Vol.3 No.4, pp.320 - 334
Received: 14 Sep 2017
Accepted: 26 Oct 2017
Published online: 26 Apr 2018 *