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Financial sector linkages and the dynamics of bank and sovereign credit spreads

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  • Kallestrup, René
  • Lando, David
  • Murgoci, Agatha

Abstract

We show that CDS premiums of sovereigns are significantly affected by the foreign exposures of their domestic banks. Our analysis uses a simple risk-weighted exposure measure which aggregates detailed data on the composition and risk of banks' foreign exposures. A 1 basis point change in our risk weighted exposure measure corresponds to an average change of approximately 0.4bp in sovereign CDS spreads. Extensive robustness checks confirm that the explanatory power of our measure is not due to common factors in CDS premiums. We also measure the size and riskiness of the sovereign's implicit and explicit guarantees extended to its domestic banking system.

Suggested Citation

  • Kallestrup, René & Lando, David & Murgoci, Agatha, 2016. "Financial sector linkages and the dynamics of bank and sovereign credit spreads," Journal of Empirical Finance, Elsevier, vol. 38(PA), pages 374-393.
  • Handle: RePEc:eee:empfin:v:38:y:2016:i:pa:p:374-393
    DOI: 10.1016/j.jempfin.2016.01.004
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    More about this item

    Keywords

    Credit risk; Banks; Sovereign risk;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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