The reaction of sovereign CDS spread volatilities to news announcements

This article explores the market reaction to news announcements extracted from the Eurointelligence newsflash. The data used in this work are yield spreads associated with 5-year sovereign credit default swap (hereafter, CDS) of a sample of euro area countries from May 15, 2012 until May 23, 2014. To this aim we used the exponential generalized autoregressive conditional heteroskedastic model which is an extended form of the GARCH model. Overall, our results provide considerable evidence that news is an important driver for CDS spread volatility. Specifically, we find that more news regarding the country-specific crisis raises the volatility. Moreover, the estimation results suggest that higher news in one selected country imply an increase in the CDS volatility of other countries, highlighting the presence of positive news spillover effect across euro-area countries. © 2016 Macmillan Publishers Ltd.