We introduce a method for measuring default risk connectedness of euro zone sovereign states using credit default swap (CDS) and bond data. The connectedness measure is based on an out-of-sample variance decomposition of model forecast errors. Due to its predictive nature, it can respond more...

Using a comprehensive dataset from German banks, we document the usage of sovereign credit default swaps (CDS) during the European sovereign debt crisis of 2008-2013. Banks used the sovereign CDS market to extend, rather than hedge, their long exposures to sovereign risk during this period....

We introduce a methodology for measuring default risk connectedness that is based on an out-of-sample variance decomposition of model forecast errors. The out-of-sample nature of the procedure leads to "realized" measures which, in practice, respond more quickly to crisis occurrences than those...