Sovereign CDS spread determinants and spill-over effects during financial crisis: A panel VAR approach

•We examine the determinants of CDS spreads during the financial crisis in the EU and potential spillover effects for Eurozone countries.•We employ a Panel Vector Autoregressive (PVAR) model.•We also employ variables that proxy for behavioral determinants.•The determinants of CDS variance are neither uniform nor stable during different periods and different countries.•Investor sentiment may be an important CDS spread determinant, along with other factors.

This paper examines the determinants of CDS spreads and potential spillover effects for Eurozone countries during the recent financial crisis in the EU. We employ a Panel Vector Autoregressive (PVAR) model which combines the advantages of traditional VAR modelling with those of a panel-data approach. In addition to variables that proxy for global and financial market spread determinants we also employ variables that proxy for behavioral determinants. We find that the determinants of CDS variance are neither uniform nor stable during different periods and different countries. For instance, as we move from 2008 to 2014 the impact of the slope of the term structure on CDS spread variance is increasing for peripheral countries such as Spain, Portugal, Italy, Greece, Ireland, and decreasing for core countries such as Germany, France, Netherlands, Belgium and Austria. Other findings indicate that investor sentiment was an important CDS spread determinant during the subprime crisis, along with other factors, while spillover effects run from larger peripheral economies such as Spain and Italy to core countries; spillover effects from Portugal, Greece, and Ireland are of minor importance.