CRISIS MEASURES OF RISK - MARKET ASSESSMENTS VERSUS MONEY EXPECTATIONS

The purpose of this paper is to explore the informational value of credit default swaps and the extent to which they may be linked to the Euroepan Debt Crisis and Economic Sentiment Indicators. The debate about the usefulness of credit default swaps intensified with the outbreak of sovereign debt stress in the euro area. CDS can be used to protect investors against losses on sovereign debt arising from so-called credit event such as default. SCDS have become important tools in the management of credit risk, and the premiums paid for the protection offered by CDS are commonly used as market indicators of credit risk. Although CDS that reference sovereign credits are only a small part of the sovereign debt market, their importance has been growing rapidly since 2008, especially in advanced economies. It is made a comparison between the dynamics of 5- years CDS and Economic Sentiment Indicators in order to unveil which one of them is better predictor of financial crisis. This study examines data on CDS Spreads and Economic Sentiment Indicators for 28 European countries- members of European Union and the Euro area for the period 2007- 2015.