The role of sovereign CDS spreads for stock prices: Evidence from the athens stock exchange over a ‘default’ period

Abstract

This chapter explores the direction of effects related to the systemic sovereign risk (i.e., proxied by CDS spreads) on a number of stock prices and returns listed on the Athens Stock Exchange, spanning the period 2005-2015, which includes both the time prior to the Greek sovereign debt crisis and after that period (which includes three bail-out and austerity programs). The empirical findings document that the presence of sovereign CDS spreads has a negative impact on stock prices and returns only over the period followed the formal adoption of the bail-out and austerity programs imposed on the Greek economy. These findings clearly illustrate the presence of an overall negative environment in an economy that goes through a dramatic reduction in market liquidity as well as strict consolidation programs that led these markets without any doubt to crash. The findings have important implications for the ongoing debate about how to reform the economy so as to mitigate total risk in the future.