D85 - Network Formation and Analysis: TheoryReturn

Using local projection (LP) method, we assess Credit Default Swap (CDS) changes in the Central-East European countries. Cost-risk optimization in public debt management refers on the fine-tuning the ratio of capital import and foreign currency denominated borrowing to domestic funds. Literature defines closeness centrality as an indicator which highlights the relative importance of an asset within a network, estimated by a quarterly minimum spanning tree graph. We show that CDS changes are driven not only by the foreign exchange shocks but also by foreign currency debt and funding as well as the closeness indicator which signs a network-bias. We also find evidence that relative isolation better describes the Czech sovereign debt market. Thus, this paper makes a new contribution to the debate of public debt funding strategies, while highlighting the importance of network-biases.