@article{93a4a7e507324538b922517dc975ee8b,
title = "Mutual excitation in eurozone sovereign CDS",
abstract = "We study self- and cross-excitation of shocks in the Eurozone sovereign CDS market. We adopt a multivariate setting with credit default intensities driven by mutually exciting jump processes, to capture the salient features observed in the data, in particular, the clustering of high default probabilities both in time (over days) and in space (across countries). The feedback between jump events and the intensity of these jumps is the key element of the model. We derive closed-form formulae for CDS prices, and estimate the model by matching theoretical prices to their empirical counterparts. We find evidence of self-excitation and asymmetric cross-excitation. Using impulse-response analysis, we assess the impact of shocks and a potential policy intervention not just on a single country under scrutiny but also, through the effect on cross-excitation risk which generates systemic sovereign risk, on other interconnected countries.",
keywords = "CDS, Feedback, Hawkes processes, Impulse-response, Jumps, Mutually exciting processes, Sovereign risk, Systemic risk",
author = "Yacine A{\"i}t-Sahalia and Laeven, {Roger J.A.} and Loriana Pelizzon",
note = "Funding Information: The first author{\textquoteright}s research was supported by the NSF under grant SES-0850533 . The second author{\textquoteright}s research was supported by the NWO under grant Vidi-2009 . The third author{\textquoteright}s research was supported by the project SYRTO of the European Union under the 7th Framework Programme (FP7-SSH/2007-2013 - Grant Agreement n ∘ 320270 ), the project MISURA, funded by the Italian MIUR and the SAFE Center, funded by the State of Hessen initiative for research LOEWE . Funding Information: We are very grateful to the Editor, Alok Bhargava, and two anonymous referees for helpful comments and suggestions that significantly improved the paper. We are also grateful to conference participants at the NBER Summer Institute Conference 2013 on Forecasting and Empirical Methods in Macro and Finance in Cambridge, Massachusetts, and the EFA Meeting 2013 in Cambridge, UK, for their comments and suggestions. Finally, we acknowledge the excellent research assistance of Lorenzo Frattarolo and the financial support in the form of a research grant from the Fondation Banque de France pour la Recherche en Economie Mon{\'e}taire , Financi{\`e}re et Bancaire. Publisher Copyright: {\textcopyright} 2014 Elsevier B.V. All rights reserved.",
year = "2014",
doi = "10.1016/j.jeconom.2014.05.006",
language = "English (US)",
volume = "183",
pages = "151--167",
journal = "Journal of Econometrics",
issn = "0304-4076",
publisher = "Elsevier BV",
number = "2",
}