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Contagion risk in african sovereign debt markets: A spatial econometrics approach
Author(s) -
Muteba Mwamba J. W.,
Manguzvane Mathias
Publication year - 2020
Publication title -
international finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.458
H-Index - 39
eISSN - 1468-2362
pISSN - 1367-0271
DOI - 10.1111/infi.12376
Subject(s) - economics , credit risk , monetary economics , credit default swap , swap (finance) , sovereign default , debt , international economics , sovereignty , sovereign debt , macroeconomics , actuarial science , finance , politics , political science , law
This study applies the spatial Durbin model to analyse the extent to which international trade and geographical proximity affect the stability of African sovereign‐debt markets. Using sovereign credit default swap spreads, our empirical findings show that it is not only a country's macroeconomic fundamentals that influence its likelihood of default but also contagion from other countries. Trade linkages are found to be a strong transmission channel for contagion risk, especially among countries that trade heavily. A decomposition of the results demonstrates that at least 60% of the variation in credit default swap spread changes is attributed to spillovers through the trading channel. A change in the weighting matrix to geographical proximity confirms the baseline findings that an African country's debt market is susceptible to macroeconomic events in other countries.