Price discovery in euro area sovereign credit markets. Evidence from the GIIPS countries, ten years after the implementation of the ban on naked CDS trading

Abstract

Subsequent to the financial crisis of 2008, EU policymakers raised concerns that destabilising speculation via outright short-selling of sovereign CDS contracts was among the root causes of excessively high credit spreads in the most distressed EU member states. Therefore, they introduced a ban on naked CDS trading in 2012. Ten years after its implementation and in the presence of rising interest rates and increased banks' exposure to sovereign risk, the analysis of price discovery in the euro area sovereign credit markets requires an update to understand the current dynamics in those markets.