Title: Sovereign default of European countries: Evidence from truncated factor vine copula model of CDS Spreads
Authors: Hoang Nguyen - Orebro University (Sweden) [presenting]
Concepcion Ausin - Universidad Carlos III de Madrid (Spain)
Pedro Galeano - Universidad Carlos III de Madrid (Spain)
Abstract: A truncated factor vine copula model is proposed to capture the joint sovereign default of European countries during and after the debt crisis. The truncated factor vine copulas can be considered as a combination of a factor copula model at the first tree layer and truncated vine copulas at higher tree layers. We employ the variational Bayesian approach to estimate copula parameters and incorporate a procedure to select the best bivariate links among the nodes of the model. We find that the dependence structure of sovereign default is fat tail and asymmetric. The conditional default probability of European countries fails if another European country fails peaks during the crisis. Furthermore, European countries become less integrated after the crisis.