Determinants of corporate CDS spreads in the Eurozone - Is there a spillover effect from sovereign to corporate credit risk?

Abstract: We study the determinants of corporate CDS spreads for 125 companies headquartered in the Eurozone, with an emphasis on sovereign CDS spreads as a main determinant of corporate CDS spreads in levels and changes. This is done by analyzing financial companies, as well as non-financial companies. The period of analysis is from January 2004 to April 2014, which has been divided into 3 sub-periods; before, during, and after the global financial crisis. We found evidence of a spillover effect in credit risk from private-to-public during the global financial crisis, and public-to-private after the crisis, mainly with the onset of the European sovereign debt crisis. The effect of sovereign-tocorporate credit risk spillover is more pronounced for companies headquartered in GIIPS countries and non-financial companies, especially after the global financial crisis.