International Credit Default Swaps Market During European Crisis: A Markov Switching Approach

This study investigates whether nonlinear relationship resulted from mutual regime switching mechanism exists in the European CDS’s markets during crisis. Multivariate Markov Switching Autoregressive Model that captures the switching mechanism is used. We analyzed the daily CDS spreads of Ireland, Italy, Portugal and Spain those most affected in European Debt Crisis. The data used in this study, belongs to the time period including 2010 and 2014 (1241 observations). The model have got three different regimes as depression, moderate growth and expansion. The results of the tests indicate that (1) CDS markets are governed by a long run relation, (2) volatility have an importance role in determining the regimes, (3) the shocks that applied to Italy and Spain are more effective than others, (4) Portugal is the more affected country between all, (5) the biggest response to the shocks are in the third regime.