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Abstract

The goal of the paper is to verify the direction of sovereign risk transmissionbetween sovereign CDS and sovereign bond markets in the Central Europeaneconomies: the Czech Republic, Hungary and Poland. We focus on the hecticcrisis period of 2008-2013. On the one hand, the sCDS market is said to reactfaster to the news than the sovereign bonds market. On the other hand, thebond market is related more closely to the internal situation of the country thanthe sCDS one and thus can price the sovereign risk more accurate. Moreover,the relationships between the markets can change during crisis time. We findthat in the case of most risky and most indebted economy in Hungary therewas a feedback between sCDS and sovereign bonds risk. In the case of PolandsCDS market risk Granger caused the risk of sovereign bonds – if we excludeinstantaneous causality from the analysis; when it is included, feedback occurred.Eventually, in the case of the Czech Republic the risk of sCDS market Grangercaused risk of the bonds market.
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