Using a generalized vector autoregressive framework in which forecast error variance decompositions are invariant to the variable ordering, this paper documents the information transmission between the sovereign CDS markets of Greece, Ireland, Italy, Portugal and Spain (GIIPS) and the sovereign debt markets of twenty-six emerging countries. This paper finds that although the European sovereign crisis was triggered by the deterioration of these countries' fiscal conditions, the sovereign debts markets of emerging countries moved ahead of the CDS markets of EU peripheral countries in terms of information transmission in the short run. The first principal component of the changes in GIIPS CDS spreads has a large variance contribution share to the forecast error variances of the sovereign debt spreads of emerging countries. Greek CDS spread contains no superior information, if not less, related to sovereign debts of emerging countries relative to the others. Finally, cross-sectional analysis indicates that an emerging country with less open to international trades and a larger market value of sovereign debts, the sovereign debts of that country is more vulnerable to the EU sovereign risk.
All Science Journal Classification (ASJC) codes