Proceedings of 3rd Global Business and Finance Research Conference
9 - 10 October 2014, Howard Civil Service International House, Taipei, Taiwan, ISBN: 978-1-922069-61-0
Analysis of Sovereign CDS and Government Bond Markets in the
Euro Zone Crisis
Takayasu Ito
Sovereign CDS and government bond markets are integrated only in the
Netherlands and not in Austria, Belgium, Finland, France, Germany, Greece, Italy,
Ireland, Portugal, or Spain. Even though the CDS and government bond markets
are separated, mutual influences between them are found in Greece, Italy, Ireland
and Portugal with a one-way influence from the government bond to the CDS
market in Spain. This means that CDS functions as insurance in Spain but not
elsewhere. The intensified sovereign crisis delivered a shock to the CDS and
government bond markets, resulting in the loss of market integration and the price
discovery function. No evidence is found that CDS intensified the degree of the
crisis because a unilateral influence from CDS to government bonds was not
observed in any of the countries studied.
JEL Classification: E43, G12
Keywords: CDS, Government Bond, Euro Zone, Sovereign Crisis
1. Introduction
Government bond markets in several Eurozone countries started to experience severe stress
in the first half of 2011. Massive sell-offs were observed, especially in Greek bonds, whose
CDS (Credit Default Swaps) premium rose dramatically. This triggered a rise in government
bond yields and CDS premiums in other countries such as Italy, Spain and Portugal. Originally,
CDS served as a sort of insurance insofar as it is a financial swap agreement whereby the
____________________________________________________________
Takayasu Ito, School of Commerce, Meiji University, ito747@meiji.ac.jp
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Proceedings of 3rd Global Business and Finance Research Conference
9 - 10 October 2014, Howard Civil Service International House, Taipei, Taiwan, ISBN: 978-1-922069-61-0
seller will compensate the buyer if there is a credit event. The buyer of the CDS makes a
series of payments to the seller and, in exchange, receives a compensation payoff if there is a
default, whereupon the seller retakes possession of the defaulting bond or loan.
When the sovereign crisis in Europe intensified, however, speculation was rampant that
hedge funds were buying CDS contracts and short selling government bonds. This arouse
from two assumptions. Firstly, the worsening of the crisis would raise CDS premiums, and
secondly that this would result in a decline in bond prices. These assumptions signify that
CDS was no longer functioning as insurance for bond holders and had intensified the crisis.
Insofar as a credit risk is priced, cash and synthetic market prices should reflect an equal
valuation, in equilibrium. If, in the short term, they are affected by factors other than credit risk,
such elements may partially obscure the co-movement between bond yield and CDS
premiums.
This paper focuses on the relationship between CDS and the underlying government bonds
in the Eurozone sovereign crisis. It investigates this from two points of view. Firstly, we look at
whether or not CDS and government bonds co-move. As Duffie (1999) and others point out, a
theoretical no-arbitrage condition between the cash and synthetic price of credit risk should
drive investment decisions and tie up the two markets in the long run. If this condition is
applied to CDS and government bonds in sovereign crisis, co-movement between them can
be confirmed. Secondly, this paper investigates whether CDS propels government bonds or
the other way. If the former is confirmed, CDS do not function as insurance and if the letter,
they do.
There are some other papers which analyze the relationship between CDS and government
bonds in the Euro zone. Fontana and Scheicher (2010) focus on Euro zone sovereign CDS
and underlying government bonds using weekly CDS and bond spreads of ten Euro area
countries for the period January 2006 to June 2010.They find that CDS spreads on average
exceeded bond spreads. They also conclude that since September 2008, market integration
for bonds and CDS has varied across countries. Palladini and Portes (2011) examine whether
non-stationary CDS and bond spreads series are bound by a cointegration relationship over
the period January2004 to March 2011 and find that the two prices should be equal to each
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Proceedings of 3rd Global Business and Finance Research Conference
9 - 10 October 2014, Howard Civil Service International House, Taipei, Taiwan, ISBN: 978-1-922069-61-0
other and in equilibrium. They also conclude that the CDS market moves ahead of the bond
market in terms of price discovery.
The analyses conducted by Fontana and Scheicher (2010), and Palladini and Portes (2011)
do not cover the period after April 2011 when the Eurozone sovereign crisis intensified. This
paper covers the sample period January 29, 2009 to September 16, 2011, and therefore does
include this period of intensification. This paper is the first to analyze the relationship between
CDS and government bonds for 11 Euro zone countries in this period, and hence can be
distinguished from related literatures.
2. Data
CDS are liquid only in the maturity of five years. CDS and government bonds with a maturity
of five years are used in this analysis. The sample period runs from January 29, 2009 to
September 16, 2011. Eleven countries whose data are available are chosen from the Euro
zone, namely Austria, Belgium, Finland, France, Germany, Greece, Italy, Ireland, Netherlands,
Portugal and Spain. Data are provided by Bloomberg on a daily basis. CDS and government
bonds are quoted by basis point and percentage in the market. The descriptive statistics of
the dataset are shown in Table1. The movements of CDS and government bonds for Greece,
Italy, and Germany are shown in Figures 1 and 2. About two weeks before the sample period
began, on January 14, 2009. Standard and Poor (S&P) downgraded the rating of Greek
government bonds to A− on the basis that the fiscal the country’s fiscal deficit would worsen
within the downward trend of the global economy. Moody’s Investors Service also
downgraded Greece's local- and foreign-currency bond ratings to Ca from Caa1 on 25 July
2011, about two months before the end of the sample period. According to Moody’s Investor
Service (2013), obligations rated Ca are highly speculative and are likely to be in default or
very close to it, with some prospect of recovering the principal and interest. Although the
International Swaps and Derivatives Association (ISDA) announced that the Greek case was
not a credit event on October 31, 2011, the last day when price information of CDS was
updated on the information vendor was September 16, 20111.
1
For details, see the press release by ISDA on October 31, 2011.
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Proceedings of 3rd Global Business and Finance Research Conference
9 - 10 October 2014, Howard Civil Service International House, Taipei, Taiwan, ISBN: 978-1-922069-61-0
Table1
Figure1
Figure2
3. Methodology
3.1. Unit Root Test
Because empirical analyses of the period from the mid-1980’s to the mid-1990’s show that
data such as interest rates, foreign exchange and stocks are non-stationary, it is firstly
necessary to check whether the data used in this paper contain unit roots. ADF (Augmented
2
Dickey/Fuller) and PP (Phillips /Perron) tests are conducted. Both the ADF and PP tests
define the null hypothesis as ‘unit roots exist’ and the alternative hypothesis as ‘unit roots do
not exist’. Fuller (1976) provides the tables for the ADF and PP tests. Firstly, the original data
are checked to see whether they contain a unit root. Then, the data with first differences are
analyzed to see whether they have a unit root in order to confirm that the data represent I (1)
variables.
3.2 Cointegration Test
A cointegration framework is presented to analyze the relationship between CDS and
government bonds. Non-stationary time series vary widely with their own short-run dynamics,
but a linear combination of these series can sometimes be stationary so that they show
co-movement with long-run dynamics. This is called cointegration by Engle and Granger
(1987). In the test of co-movement between CDS and government bonds by cointegration,
equation (1) is estimated by Ordinary Least Squares (OLS) to find out whether the residual
contains unit roots.
CDSt     GBt  ut
2
(1)
See Dickey and Fuller (1979), Dickey and Fuller (1981), and Phillips and Perron (1988) .
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Proceedings of 3rd Global Business and Finance Research Conference
9 - 10 October 2014, Howard Civil Service International House, Taipei, Taiwan, ISBN: 978-1-922069-61-0
C D St ＝ CDS
GBt = Government Bonds
When series CDSt and GBt are both non-stationary I (1), they are said to be in the
relationship of cointegration if their linear combination is stationary I (0). The cointegration
relationship between CDSt and GBt implies that government bonds and CDS move
together in a long-run equilibrium. In addition to testing whether government bond and CDS
are in a cointegration relationship, the cointegration vector (1,-1), β in the equation (1), is
checked using the dynamic OLS method developed by Stock and Watson (1993). Equation
(2) is used to test if β = 1 can be rejected. GBt i denotes the lead and lag variables of
3
government bonds . If β = 1 cannot be rejected, CDS changes to the same degree as
government bonds. The test of the cointegration vector is only conducted on a pair of samples
when they are in a cointegration relationship.
p
CDSt     GBt   bi GBt i  ut
(2)
i  p
Firstly, analyses on the pair-wise relationship between CDS and government bonds of five
years maturity are conducted. The co-movement of CDS with government bonds is then
investigated using the cointegration test, and the cointegration vector test is used to
determine whether they are in a one to one relationship. These results can be divided into
three cases and interpreted as shown below.
Case
Cointegration
Cointegration Vector
Ⅰ
No
--
Ⅱ
Yes
β＝1　cannot　be denied
Ⅲ
Yes
β＝1　can　be denied
ⅠCDS does not co-move with government bonds and the CDS market is segmented from the
government bond market.
ⅡCDS co-moves with government bonds and their markets are integrated.
ⅢCDS co-moves with government bonds and they are not in a relationship of one to one
3
As for the number of lead and lag terms, twelve is used. Hirayama and Kasuya (1996) provide empirical analysis
using Rats procedure SWDYNAMIC.PRG.
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Proceedings of 3rd Global Business and Finance Research Conference
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relationship.
3.3 Granger Causality Test
With regard to the variables CDSt and GBt , the Granger causality test checks whether
CDSt affects GBt or GBt affects CDSt or CDSt and GBt mutually in a time series
model. The original data are usually transformed into the change ratio to avoid the problem of
spurious regression, but doing so also causes an error. Toda and Yamamoto (1995) develop
the Granger causality test to use directly with non-stationary data. In the present study, the
null hypothesis H 0 as to the influence of GBt on CDSt and of CDSt on GBt is tested.
According to this method, trend term t and p + 1 (original lag plus one) are added for the
estimation. Original lag length is decided by the Bayesian Information Criterion (BIC)
standard.
𝑝+1
𝑝+1
𝐶𝐷𝑆𝑡 = 𝑢0 + 𝑢𝑡 + ∑ 𝛼𝑖 𝐶𝐷𝑆𝑡−𝑖 + ∑ 𝛽𝑖 𝐺𝐵𝑡−𝑖 + 𝑢𝑡
𝑖=1
(3)
𝑖=1
𝐻0 : 𝛽1 = 𝛽2 = ⋯ 𝛽𝑝 = 0
𝐻1 : 𝐸𝑖𝑡ℎ𝑒𝑟 𝛽𝑖 ≠ 0 (𝑖 = 1,2, ⋯ , 𝑝)
𝑝+1
𝑝+1
𝐺𝐵𝑡 = 𝑣0 + 𝑣𝑡 + ∑ 𝛾𝑖 𝐺𝐵𝑡−𝑖 + ∑ 𝛿𝑖 𝐶𝐷𝑆𝑡−𝑖 + 𝑢𝑡
𝑖=1
(4)
𝑖=1
𝐻0 : 𝛾1 = 𝛾2 = ⋯ 𝛾𝑝 = 0
𝐻1 : 𝐸𝑖𝑡ℎ𝑒𝑟 𝛾𝑖 ≠ 0 (𝑖 = 1,2, ⋯ , 𝑝)
The F test is conducted by estimating equations (3) and (4) using OLS and summing the
squared error. If the null hypothesis of H 0 in equation (3) is rejected, GBt is considered to
explain CDSt . In other words, government bonds cause movement in CDS. If the null
hypothesis of H 0 in the equation (4) is rejected, CDSt is considered to explain GBt . In
other words, CDS causes movement in government bonds. Pair-wise analyses on CDS and
GB over the five year maturity period are then conducted. These results can be divided into
three cases and interpreted as shown below.
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Proceedings of 3rd Global Business and Finance Research Conference
9 - 10 October 2014, Howard Civil Service International House, Taipei, Taiwan, ISBN: 978-1-922069-61-0
Case
Causlity From CDS to Government Bond
Causality From Government Bond to CDS
Ⅰ
Yes
Yes
Ⅱ
Yes
No
Ⅲ
No
Yes
ⅠThe CDS and bond markets influence each other. No judgment can be made about the
insurance function of CDS.
ⅡThe CDS market influences the government bond market unilaterally. CDS does not
function as insurance.
ⅢThe government bond market influences the CDS market unilaterally. CDS functions as
insurance.
4.Resutls
5.1 Unit Root Test
Firstly, ADF and PP tests are conducted for the original series both with and without time
trends. The BIC standard is used for the determination of lag length in the ADF test. The
critical point of 5% for the t type of T = ∞ is –2.86(without trend) and –3.41(with trend) as
reported in Fuller (1976). The results are shown in Tables 2and 3.It is apparent that all the
variables are non-stationary.
Table 2
Table3
Next, the data with first difference from the original data are analyzed using the ADF and PP
tests. It is possible to conclude that all the variables are I (1) These results are shown in
Tables 4 and 5.
Table4
Table5
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Proceedings of 3rd Global Business and Finance Research Conference
9 - 10 October 2014, Howard Civil Service International House, Taipei, Taiwan, ISBN: 978-1-922069-61-0
5.2 Cointegration Test
Firstly, pair-wise analyses on CDS and government bonds in five-year maturities are
conducted. The relationship of cointegration is confirmed only in the Netherlands and in no
other country. Thus Dutch government bonds and CDS moved in long-term equilibrium during
the Euro zone sovereign crisis. In other countries, government bonds and CDS moved
separately. These results are reported in Table 6.
Next, whether the size of β (the impact of government on CDS in Netherland) is 1 or not is
investigated. The size of β is 0.018. This indicates that the impact of government bonds on
CDS in the Netherlands is very small. These results are reported in Table 7.
Table6
Table7
5.3 Granger Causality Test
Pair-wise analyses on CDS bond and government in five-year maturities are conducted.
Mutual causalities are found in Greece, Italy, Ireland and Portugal. Causality from government
bonds to CDS is found in Spain. No causality between government bond and CDS is found in
Austria, Belgium, Finland, France, Germany and the Netherlands.
Table8
5. Conclusion
This paper focuses on the relationship between sovereign CDS and underlying government
bonds in the context of the Eurozone crisis. The countries analyzed in this paper are Austria,
Belgium, Finland, France, Germany, Greece, Italy, Ireland, the Netherlands, Portugal and
Spain. The investigations are conducted from two viewpoints. Firstly, whether CDS and
government bond co-move is tested. Secondly, whether CDS propels government bond, or,
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Proceedings of 3rd Global Business and Finance Research Conference
9 - 10 October 2014, Howard Civil Service International House, Taipei, Taiwan, ISBN: 978-1-922069-61-0
government bond propels CDS is tested. If the former is confirmed, CDS does not function as
insurance tool and if the latter, they do.
This paper concludes that CDS and government bond markets are integrated only in the
Netherlands. But in other countries such as Austria, Belgium, Finland, France, Germany,
Greece, Italy, Ireland, Portugal and Spain, CDS and government bond markets are not
integrated because no co-movement is found. In Austria, Belgium, Finland, France, Germany
and Netherland, CDS and government bond markets are totally segmented. On the other
hand, CDS and government bond markets are separated in Greece, Italy, Ireland, Portugal,
and Spain, but mutual influences are found in Greece, Italy, Ireland and Portugal. A one-sided
influence from government bonds to CDS is found in Spain, indicating that in this country CDS
functions as insurance. In the other countries, such an insurance function was not found. No
evidence was found that CDS intensified the degree of the sovereign crisis unilaterally
because such a one –way influence from CDS to government bonds was not observed in any
of the countries studied.
The results reported here are different from those of Fontana and Scheicher (2010) and
Palladini and Portes (2011). Fontana and Scheicher (2010) conclude that since September
2008, market integration for bonds and CDS varies across countries. Palladini and Portes
(2011) report that the CDS market moves ahead of the government bond market in terms of
price discovery. This divergence arises mainly because of the difference in the sample period
studied. The analyses conducted by Fontana and Scheicher (2010), and Palladini and Portes
(2011) do not cover the period after April 2011 when the Eurozone sovereign crisis intensified.
This paper covers the period from January 29, 2009 to September 16, 2011. Within this
timeframe the intensified sovereign crisis delivered a shock to the government bonds and
CDS markets, resulting in the loss of market integration and the price discovery function.
References
Dickey,D.A. and W.A. Fuller.,1979. Distribution of the estimators for autoregressive time
series with a unit root. Journal of the American Statistical Association 74(366), 427-431．
Dickey,D.A. and W.A. Fuller.,1981. Likelihood ratio statistics for autoregressive time series
with a unit root. Econometrica 49(4), 107-1072.
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Proceedings of 3rd Global Business and Finance Research Conference
9 - 10 October 2014, Howard Civil Service International House, Taipei, Taiwan, ISBN: 978-1-922069-61-0
Duffie,D. ,1999. Credit swap valuation. Financial Analysts Journal 55(1),73-87.
Engle,R.F. and C.W.J. Granger., 1987.Co-integration and error correction: representation,
estimation and testing. Econometrica 55(2), 251-276.
Fontana, A. and M. Scheicher., 2010. An analysis of euro area sovereign CDS and their
relation with government bonds European Central Bank. Working Paper Series: 1271.
Fuller,W.A., 1976. Introduction to statistical time series. John Wiley & Sons,Inc.
Johansen,S., 1988. Statistical analysis of cointegrated vectors. Journal of Economic
Dynamics and Control 12 (2-3), 231-254.
Moody’s Investor Service, 2013. Rating symbols and definitions.
Palladini,G. and R. Portes., 2011. Sovereign CDS and bond pricing dynamics in the Euro-area.
CEPR Discussion Papers: 8651.
Stock,J.H. and Watson, M.W., 1993. A simple estimator of cointegrating vectors in higher
order integrated systems. Econometrica 61(4), 783-820.
Toda,H.Y. and Yamamoto, T., 1995. Statistical inference in vector autoregressions with
possibly integrated processes. Journal of Econometrics 66(1-2), 225-250.
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Proceedings of 3rd Global Business and Finance Research Conference
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bp
6,000
5,000
4,000
3,000
Greece
Italy
2,000
France
1,000
07/29/2011
05/29/2011
03/29/2011
01/29/2011
11/29/2010
09/29/2010
07/29/2010
05/29/2010
03/29/2010
01/29/2010
11/29/2009
09/29/2009
07/29/2009
05/29/2009
03/29/2009
01/29/2009
0
Figure 1 Movement of Five Year CDS Premium
Note: Sample period is from January 29, 2009 to September 16, 2011.
Data source is Bloomberg.
%
30
25
20
15
Greece
Italy
10
France
5
07/29/2011
05/29/2011
03/29/2011
01/29/2011
11/29/2010
09/29/2010
07/29/2010
05/29/2010
03/29/2010
01/29/2010
11/29/2009
09/29/2009
07/29/2009
05/29/2009
03/29/2009
01/29/2009
0
Figure 2 Movement of Five Year Government Bond Yield
Note: Sample period is from January 29, 2009 to September 16, 2011.
Data source is Bloomberg.
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Proceedings of 3rd Global Business and Finance Research Conference
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Table 1
Descriptive statistics of data for analysis
Variable
Average
SD
Min
Max
Median
Austria
2.59
0.45
1.66
3.47
2.67
Belgium
2.93
0.47
1.95
3.85
2.90
Finland
2.38
0.41
1.49
3.29
2.51
France
2.44
0.37
1.59
3.13
2.56
Germany
2.17
0.40
1.08
2.89
2.30
Greece
9.72
5.70
3.19
27.19
8.74
Italy
3.32
0.58
2.59
5.45
3.15
Ireland
5.87
3.08
3.20
17.12
4.35
Netherland
2.40
0.42
1.50
3.21
2.51
Portugal
5.42
3.37
2.70
17.51
3.89
Spain
3.55
0.75
2.64
5.68
3.24
Austria
89.05
36.92
47.59
268.98
80.53
Belgium
112.25
60.67
32.08
297.13
114.69
Finland
34.78
14.38
16.25
90.42
30.69
France
67.00
33.84
19.66
191.83
68.90
Germany
0.43
0.16
0.19
0.91
0.40
Greece
736.51
662.71
100.50
5034.45
720.66
Italy
159.39
76.07
57.72
504.00
154.89
Ireland
371.39
238.75
110.30
1180.50
257.30
Netherland
48.86
21.27
24.50
138.31
44.82
Portugal
327.28
280.62
43.13
1214.86
274.58
Spain
185.45
94.85
53.23
429.65
197.01
Government Bond 5Y
CDS 5Y
Notes:
Sample period is from January 29, 2009 to September 16, 2011.
Government Bond is expressed by percentage.
CDS is expressed by basis point. One basis point is 0.01%.
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Proceedings of 3rd Global Business and Finance Research Conference
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Table 2
ADF unit root test (original series)
Variable
Without Trend
With Trend
Variable
Government Bond 5Y
Without Trend
With Trend
CDS 5Y
Austria
-1.309
-1.512
Austria
-0.919
-2.256
Belgium
-0.328
-1.866
Belgium
0.271
-2.904
Finland
-1.502
-1.688
Finaland
-0.391
-1.583
France
-1.141
-1.423
France
1.354
-1.389
Germany
-1.109
-1.382
Germany
-0.089
-2.208
Greece
2.389
-2.099
Greece
2.489
-0.219
Italy
0.284
-2.153
Italy
1.217
-1.209
Ireland
-0.342
-2.346
Ireland
0.287
-3.018
Netherland
-1.465
-1.340
Netherland
2.135
-2.096
Portugal
1.154
-1.830
Portugal
1.867
-1.937
Spain
0.111
-2.978
Spain
0.584
-3.113
* indicates significance at 5% level.
5% critical values are −2.86 (without trend) and −3.41 (with trend).
Table 3
PP unit root test (original series)
Variable
Without Trend
With Trend
Government Bond 5Y
Variable
Without Trend
With Trend
CDS 5Y
Austria
-1.274
-1.582
Austria
-1.676
-1.235
Belgium
-1.511
-1.959
Belgium
-0.089
-2.071
Finland
-1.906
-2.072
Finland
-0.681
-0.630
France
-1.326
-1.533
France
0.393
-1.254
Germany
-0.977
-1.400
Germany
-0.615
-1.322
Greece
0.100
-2.970
Greece
0.903
-1.221
Italy
-1.158
-2.287
Italy
0.184
-0.932
Ireland
-0.806
-1.521
Ireland
-0.216
-2.065
Netherland
-1.207
-1.507
Netherland
-3.676
-3.111
Portugal
0.488
-1.582
Portugal
0.767
-1.781
Spain
-1.245
-3.033
Spain
-0.904
-3.533
* indicates significance at 5% level.
itical values are −2.86 (without trend) and −3.41 (with trend).
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Proceedings of 3rd Global Business and Finance Research Conference
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Table 4
ADF unit root test (first differenced series)
Variable
Without Trend
With Trend
Variable
Government Bond 5Y
Without Trend
With Trend
CDS 5Y
⊿Austria
-26.706*
-26.420*
⊿Austria
-18.856*
-18.943*
⊿Belgium
-23.231*
-23.147*
⊿Belgium
-19.193*
-17.216*
⊿Finland
-20.946*
-21.323*
⊿Finland
-13.967*
-14.042*
⊿France
-21.141*
-21.045*
⊿France
-16.386*
-16.520*
⊿Germany
-25.519*
-25.545*
⊿Germany
-19.740*
-19.672*
⊿Greece
-10.797*
-11.206*
⊿Greece
-10.798*
-11.151*
⊿Italy
-19.116*
-19.043*
⊿Italy
-20.698*
-19.229*
⊿Ireland
-11.124*
-11.047*
⊿Ireland
-18.271*
-18.408*
⊿Netherland
-26.541*
-26.629*
⊿Netherland
-23.850*
-22.339*
⊿Portugal
-8.833*
-9.016*
⊿Portugal
-11.588*
-11.849*
⊿Spain
-19.081*
-18.988*
⊿Spain
-18.135*
-18.147*
Without Trend
With Trend
* indicates significance at 5% level.
5% critical values are −2.86 (without trend) and −3.41 (with trend).
Table 5
PP unit root test (first differenced series)
Variable
Without Trend
With Trend
Variable
Government Bond 5Y
CDS 5Y
⊿Austria
-26.779*
-26.779*
⊿Austria
-18.869*
-18.917*
⊿Belgium
-23.248*
-23.797*
⊿Belgium
-19.947*
-20.012*
⊿Finland
-26.737*
-26.737*
⊿Finland
-23.109*
-23.323*
⊿France
-26.376*
-26.382*
⊿France
-23.204*
-23.304*
⊿Germany
-25.571*
-25.595*
⊿Germany
-19.761*
-19.853*
⊿Greece
-22.928*
-22.972*
⊿Greece
-13.320*
-13.299*
⊿Italy
-22.218*
-22.268*
⊿Italy
-20.916*
-20.958*
⊿Ireland
-18.958*
-18.959*
⊿Ireland
-18.313*
-18.346*
⊿Netherland
-26.625*
-26.628*
⊿Netherland
-23.885*
-24.285*
⊿Portugal
-19.375*
-19.441*
⊿Portugal
-18.577*
-18.637*
⊿Spain
-21.187*
-21.199*
⊿Spain
-23.043*
-23.073*
* indicates significance at 5% level.
5% critical values are −2.86 (without trend) and −3.41 (with trend).
14
Proceedings of 3rd Global Business and Finance Research Conference
9 - 10 October 2014, Howard Civil Service International House, Taipei, Taiwan, ISBN: 978-1-922069-61-0
Table 6
Cointegration test
Variable
Test Statistics
Government Bond 5Y, CDS 5Y
Austria
-2.169
Belgium
-1.343
Finland
-1.46
France
-0.677
Germany
-1.981
Greece
0.043
Italy
-0.763
Ireland
-2.446
Netherland
-3.742*
Portugal
-2.867
Spain
-2.237
Notes:
* indicates significance at 5% level．
** indicates significance at 10% level．
5% critical value is −3.3377 from MacKinnon (1991)．
10% critical value is −3.0462 from MacKinnon (1991)．
Table 7
Cointegration vector test
Variable
β
Modified SE
Modified t Value
0.01813
0.136
7.220
Government Bond 5Y, CDS 5Y
Netherland
Notes:
β = 1 can be rejected because modified t value is smaller than 5% critical value (1.96).
15
Proceedings of 3rd Global Business and Finance Research Conference
9 - 10 October 2014, Howard Civil Service International House, Taipei, Taiwan, ISBN: 978-1-922069-61-0
Table 8
Granger causality test
Test Statistics
Test Statistics
Government Bond 5Y to CDS5Y
CDS 5Y to Government Bond 5Y
Austria
1.247
0.415
Belgium
1.198
0.208
Finland
1.445
0.553
France
1.383
0.121
Germany
1.540
0.050
Greece
13.142*
15.626*
Italy
44.674*
5.372*
Ireland
60.991*
3.879*
Netherland
0.783
1.500
Portugal
73.605*
5.595*
Spain
13.455*
1.011
Notes:
* indicates significance at 5 % level.
As for the number of lags, one ia added to BIC selection.
16