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Sovereign Credit Risk Co-Movements in the Eurozone: Simple Interdependence or Contagion?

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  • Manuel Buchholz
  • Lena Tonzer

Abstract

Since the onset of the eurozone sovereign debt crisis, credit risk spreads in Europe have diverged. Despite this divergence, credit risk comoves strongly within certain country groups such as the eurozone periphery. We seek to answer what the determinants of the observed pattern of credit risk co-movements are and whether and during which periods sovereign debt markets have been subject to contagion. We proceed in three steps. First, we apply dynamic conditional correlations from a multivariate GARCH model to sovereign CDS spreads of 17 countries over the period 2008 to 2012. Second, we separate periods of simple interdependence from contagion. Third, we analyze the determinants behind credit risk co-movements and the role of contagion using regression analysis. Our results reveal a high degree of co-movements in sovereign credit risk, especially for eurozone countries during the sovereign debt crisis. We find strong evidence for both fundamentals and nonfundamentals based contagion. Similarities in economic fundamentals, cross-country linkages in banking and common market sentiment play a significant role.
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  • Manuel Buchholz & Lena Tonzer, 2016. "Sovereign Credit Risk Co-Movements in the Eurozone: Simple Interdependence or Contagion?," International Finance, Wiley Blackwell, vol. 19(3), pages 246-268, December.
  • Handle: RePEc:bla:intfin:v:19:y:2016:i:3:p:246-268
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    Cited by:

    1. Saker Sabkha & Christian De Peretti & Dorra Hmaied, 2017. "International risk spillover in the sovereign credit markets: An empirical analysis," Working Papers hal-01652526, HAL.
    2. Born, Benjamin & Müller, Gernot J. & Pfeifer, Johannes, 2014. "Does austerity pay off?," SAFE Working Paper Series 77, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    3. Blatt, Dominik & Candelon, Bertrand & Manner, Hans, 2015. "Detecting contagion in a multivariate time series system: An application to sovereign bond markets in Europe," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 1-13.
    4. Susana Martins & Cristina Amado, 2018. "Financial Market Contagion and the Sovereign Debt Crisis: A Smooth Transition Approach," NIPE Working Papers 08/2018, NIPE - Universidade do Minho.
    5. repec:mth:ijafr8:v:8:y:2018:i:4:p:115-138 is not listed on IDEAS
    6. Papafilis, Michalis-Panayiotis & Psillaki, Maria & Margaritis, Dimitris, 2015. "Interdependence between Sovereign and Bank CDS Spreads in Eurozone during the European Debt Crisis - The PSI Effect," MPRA Paper 68037, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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