Interdependence between Sovereign and Bank CDS Spreads in Eurozone during the European Debt Crisis - The PSI Effect (original) (raw)
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2019
This study examines the nexus between sovereigns and banks during a crisis with a focus on the effects of PSI, the voluntary exchange program of Greek sovereign bonds with private sector involvement. The effectiveness of the program is evaluated through its impact on credit default swaps of 8 Eurozone countries and 21 banks, using daily data from 2009 to 2014. Using linear and nonlinear causality analyses, it is found that the link between sovereign and bank risk weakened after PSI, while the persistence and magnitude of lead-lag interactions also declined in the same period. A difference-in-difference model confirms this result. The findings are also robust to second moment filtering, with GARCH-BEKK residuals indicating the presence of significant albeit declining nonlinear causal effects. The empirical evidence suggests that sovereign debt restructuring initiatives, such as PSI, could be an effective policy measure to ease off pressure on the nexus between banks and their soverei...
Sovereign bond spreads and CDS premia in the Eurozone: A causality analysis
2020
This article presents an analysis of the possible relationship between the spreads of sovereign bonds and the premia of credit default swaps (CDS) to determine whether they are useful tools for the measurement of the sovereign risk either separately or by taking into account the joint evolution of their values. The data refer to ten countries in the Eurozone along 2008–2016. By applying the causality Granger test for these variables, after six different ways of proxy, CDS premia are found to be the cause of the risk spreads in certain cases, although a bidirectional relationship is predominant in many other cases. So the CDS market contains clear and highly useful information on the sovereign risk.
International Journal of Accounting and Financial Reporting, 2018
The Greek crisis has brought to light the strong nexus between the credit risks of European banks and their sovereign. We study this phenomenon in Germany, France, Italy and Spain by estimating the conditional correlations between sovereign and bank CDS bond spreads over the period 2006-2015. Trivariate time-varying regime switching correlation analyses, such as the STCC-GARCH and DSTCC-GARCH, are implemented to associate causally the state shifts to the dynamics of the so-called “transition variables”. We find evidence of significant changes in the correlation structures due to the evolution of both the Greek and Italian crises.
2020
This paper examines the evolution of the dynamic relationship between the sovereign credit default swap (CDS) market and the sovereign bond market (ranked by maturity) during the period 2010 to 2016 to detect the direct and indirect contingent power of these products. For this purpose, our research paper proposes an ADCC-garch model. The results show that the maturity significantly affects the sensitivity of sovereign bonds to contagion. Also, while sovereign CDS present a channel of fundamental contagion, particular channels should be considered, especially for sovereign bonds with short-maturity that are very exposed to these channels.
Sovereign Contagion in Europe: Evidence from the CDS Market
SSRN Electronic Journal, 2000
This paper addresses the following questions. Is there evidence of nancial contagion in the Eurozone? To what extent a country's vulnerability to contagion depends on fundamentals as opposed the government's credibility? We look at the empirical evidence on European sovereigns CDS spreads and estimate an econometric model where a crucial role is played by time varying parameters. We model CDS spread changes at country level as reecting three dierent factors: a Global sovereign risk factor, a European sovereign risk factor and a Financial intermediaries risk factor. Our main ndings are as follows. First, Unlike the US subprime crisis which aected all European sovereign risks, the Greek crisis is largely a matter concerning the Euro Zone. Second, dierences in vulnerability to contagion within the Eurozone are even more remarkable: the core Eurozone members become less vulnerable to EUZ contagion, possibly due to a safe-heaven eect, while peripheric countries become more vulnerable. Finally, market fundamentals go a long way in explaining these dierences: they jointly explain between 54 and 80% of the crosscountry variation in idiosyncratic risks and in the vulnerability to contagion, largely supporting the wake-up call hypothesis according to which market participants become more wary of market fundamentals during nancial crises.
Unveiling Sovereign Effects in European Banks CDS Spreads Variations
SSRN Electronic Journal, 2000
Starting from the structural model developed by and the derived notion of distanceto-default, we study the determinants of credit default swap (CDS) spreads for a sample of European banks over a period from January 2006 to December 2011. In particular, we test variables that are specific to the banking industry and look at the possible interaction with CDS spreads for the related sovereigns. We confirm findings from the literature review regarding the low significance of the structural model and its breakdown in times of stress. We confirm the importance of macro-economic components such as the general level of interest rates and the general state of the economy, particularly in times of stress. We find that before the crisis period the micro-and macro-components are generally predominant in the determination of CDS spread variations while the influence of sovereigns' CDS become more important when entering further into the crisis period. Interestingly, southern European countries are the first to become significant at the start of the crisis. Progressively, all CDS countries become increasingly significant, overweigh all other explanatory variables and remain so even after the crisis period, thereby suggesting the focused attention of market participants for the sovereign dimension.
SSRN Electronic Journal, 2018
The Greek crisis has brought to light the strong nexus between the credit risks of European banks and their sovereign. We study this phenomenon in Germany, France, Italy and Spain by estimating the conditional correlations between sovereign and bank CDS bond spreads over the period 2006-2015. A trivariate time-varying regime switching correlation analysis, the STCC-GARCH, is implemented to associate the state shifts to the dynamics of the so-called "transition variable". We start selecting as transition variable the first difference of the spread between Greek and German sovereign bond yields. We then expand the model-via a DSTCC-GARCH parameterization-and introduce a second transition variable, representing the influence of the Italian sovereign debt. There is a clear evidence of significant changes in the correlations structure due to the evolution of the Greek crisis and to the sustainability of the Italian debt, which in turns impinges on the tenability of the euro project. The role of Italy on the nexuses of France and Germany increases after 2011.
2011
In this paper we take an innovative econometric look at the Euro Zone Sovereign Debt Crisis. We are particularly interested in understanding which determinants have led investors to ask for higher yields on sovereign debt from the Euro shatter belt. We dismiss the definition of speculation previously used in the literature, on the basis of the irrelevance of Granger Causality as an operational tool for this purpose. Instead, we suggest that speculative behavior would only exist if market assessment would be unrelated to economic fundamentals of such countries. Using a cross section of countries, we improve on the scarce literature on the Econometrics of Credit Default Swap Markets on sovereign debt. Firstly, we use an ordered probit model to determine whether economic fundamentals are driving the implied rating assessments. Secondly, we provide a pioneering application of quantile regression to this domain, to determine which variables matter at different conditional quantiles of th...
Impacts of the financial crisis on eurozone sovereign CDS spreads
Journal of International Money and Finance, 2014
We study the variation of sovereign credit default swaps (CDSs) of eurozone countries, their persistence and co-movements, with particular attention given to the impact of the financial crisis. Specifically, using a dual fractional integration model, we test the evidence of long memory for CDSs of ten eurozone countries. Our analysis reveals that price discovery processes satisfy the minimum requirements for a weak form of efficiency for sovereign CDS markets, even during the crisis. In contrast, we document the spreading out of persistent CDS uncertainty among the peripheral economies with its outbreak. We provide evidence that CDS uncertainty has implications for the pricing of sovereign risk including that of core countries in the crisis period. Finally, we present the potential spillover effects utilizing a dynamic q The authors wish to thank to the managing guest editor
Measuring Contagious Effects on Euro Area Debt Crisis Using Daily CDS Spreads Changes
This paper complements several recent studies on the contagion in the euro area after the historic tensions on the debt market. We consider the popular approach of dynamic conditional correlation (DCC) as introduced by Engle (2002) for sovereign CDS spreads associated with selected euro area countries. Additionally, we extend prior results by explaining to what extent the contagion is generated by market and macroeconomic indicators.