We analyze the nature of sovereign credit risk for selected Asian and European countries through a set of sovereign CDS data for an eighty-year period that includes the episode of the 2008-2009 financial crisis. Our principal component analysis results suggest that there is strong commonality in sovereign credit risk across countries after the crisis. The regression tests show that the commonality is linked to both local and global financial and economic variables. Besides, we also notice intriguing differences in the sovereign credit risk behavior of Asian and European countries. Specifically, we find that some variables, including foreign reserve, global stock market, and volatility risk premium, affect the of Asian and European sovereign credit risks in the opposite direction. Further, we assume that the arrival rates of credit events follow a square-root diffusion from which we build our pricing model. The resulting model is used to decompose credit spreads into risk premium and credit-event components.

We analyze the nature of sovereign credit risk for selected Asian and European countries through a set of sovereign CDS data for an eighty-year period that includes the episode of the 2008-2009 financial crisis. Our principal component analysis results suggest that there is strong commonality in sovereign credit risk across countries after the crisis. The regression tests show that the commonality is linked to both local and global financial and economic variables. Besides, we also notice intriguing differences in the sovereign credit risk behavior of Asian and European countries. Specifically, we find that some variables, including foreign reserve, global stock market, and volatility risk premium, affect the of Asian and European sovereign credit risks in the opposite direction. Further, we assume that the arrival rates of credit events follow a square-root diffusion from which we build our pricing model. The resulting model is used to decompose credit spreads into risk premium and credit-event components.

When adjusted to sovereign entities, the structural credit risk model assumes a negative (positive) relationship between sovereign CDS spreads and stock prices (volatilities). In theory both markets are supposed to incorporate new information simultaneously. Discrepancies from the theoretical relationship can be exploited by capital structure arbitrageurs. In our thesis we study the intertemporal relationship between sovereign CDS and stock index markets in East Asia during the period of 2007 – 2011. We detect a negative (by and large positive) relationship between the Asian CDS spreads and stock indexes (volatilities). Across the whole region the sovereign CDS market dominates the price discovery process. However, 4 out of 7 Asian countries (Japan, Korea, Malaysia and the Philippines) demonstrate a feedback effect. The stock markets of countries with higher credit spreads (Indonesia, the Philippines and Korea) appear to react more severely at heightened variance in the CDS market. When considered separately for turbulent vs. calm periods, we find that the lead-lag relationship between the Asian sovereign CDS and stock markets is not stable. Apart from that, both markets become more interrelated during periods of increased volatility. The dependency of Asian CDS spreads and stock indexes on the “fear index” detected in the frames of robustness check implies an integration of both markets into the global one. Therefore, while seeking for arbitrage opportunities in the respective Asian markets one should also take into account possible influences of broader global factors.

This thesis analyses what drives sovereign credit risk when contagion is con- trolled for. CDS spreads are used as a measure of credit risk and bond yields are used to estimate interconnectedness of the examined countries. The main contribution lies in the use of high-frequency data and a robust wavelet based estimator in addition to spatial econometric model. The aim of this thesis is to test for presence of contagion and to evaluate which fundamentals are decisive for market perception of sovereign credit risk. Another goal is to evaluate the possibility of a structural break caused by the Greek debt restructuring. The results show that the restructuring did bring change. Contagion is present during the post-crisis period and it diminishes as the economies recover. Sim- ilarly, fundamentals are of higher importance in the post-crisis period when compared with the following period. JEL Classification C22, C31, C33, G01, G32, G33 Keywords spatial econometrics, CDS spreads, sovereign credit risk, financial contagion, realised covari- ance Author's e-mail josef.zahlava@gmail.com Supervisor's e-mail petr.gapko@seznam.cz

Cette thèse étudie le risque de crédit souverain et son impact sur les banques et les entreprises. Le premier essai montre que le risque de crédit bancaire est lié au risque de crédit souverain via l’exposition commune au risque systémique au lieu du sauvetage implicite ou de l’exposition excessive aux obligations émises par le pays d’origine. Dans le deuxième essai, je construis un modèle de structure du capital qui prédit une corrélation négative entre le niveau d’endettement des grands entreprises et le risque de crédit souverain à cause du sauvetage implicite. Cette prédiction est confirmée en suite par des preuves empiriques des entreprises dans la zone euro. Le troisième essai donne un modèle joint de CDS et d’obligation pour identifier les composantes de défaut et de liquidité dans les spreads de CDS et les rendements obligataires. Je trouve une composante de liquidité importante dans les spreads de CDS des pays périphériques de la zone euros et conclus que le fait de ne pas prendre en compte de l’illiquidité des CDS conduit à surestimer la composante de défaut dans le rendement obligataire. / This thesis studies sovereign credit risk and its impact on banks and industrial firms. The first essay shows that bank credit risk is linked to sovereign credit risk through common exposure to systemic risk instead of implicit bailout or excessive holding of home country bonds. In the second essay, I build a trade-off model of capital structure which predicts negative correlation between optimal leverage of big firms and sovereign credit risk due to implicit bailout. The model prediction is confirmed by empirical evidence from firms in the euro area. The third essay provides a joint pricing model of CDS and bond to disentangle the default and liquidity component in CDS spread and bond yield spread. I find a remarkable liquidity component in the CDS spreads of peripheral euro area countries and conclude that ignoring CDS illiquidity leads to overestimation of default component in bond yield.