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Volatility spillovers in the European bank CDS market

Author

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  • Alemany, Aida
  • Ballester, Laura
  • González-Urteaga, Ana

Abstract

From the 2007 subprime crisis to the recent Eurozone debt crisis, the banking industry has experienced terrible financial instability with increasing volatility levels of bank default probability. Using European CDS spreads data from January 2006 to March 2013, this paper sheds light on the impact of three recent significant events of credit risk volatility transmission between, firstly, Eurozone and non-Eurozone banks, and then between distressed peripheral and core countries inside the Eurozone. We employ an asymmetric multivariate BEKK model to measure cross-market volatility spillovers. We find that both recent crises are distinct episodes. The global financial crisis that originated outside Europe is characterized by unidirectional volatility spillovers in credit risk from inside to outside the Eurozone. By contrast, the Eurozone debt crisis is revealed to be local in nature with the euro as the key element, suggesting a financial market fragmentation within the Eurozone between distressed peripheral and non-distressed core Eurozone countries, whereas retaining the local currency has acted as a firewall.

Suggested Citation

  • Alemany, Aida & Ballester, Laura & González-Urteaga, Ana, 2015. "Volatility spillovers in the European bank CDS market," Finance Research Letters, Elsevier, vol. 13(C), pages 137-147.
  • Handle: RePEc:eee:finlet:v:13:y:2015:i:c:p:137-147
    DOI: 10.1016/j.frl.2015.02.003
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    Cited by:

    1. Liu, Chih-Liang & Yang, Hsin-Feng, 2017. "Systemic risk in carry-trade portfolios," Finance Research Letters, Elsevier, vol. 20(C), pages 40-46.
    2. repec:eee:finana:v:55:y:2018:i:c:p:35-49 is not listed on IDEAS
    3. repec:eee:ememar:v:31:y:2017:i:c:p:96-115 is not listed on IDEAS
    4. Apergis, Nicholas & Lau, Marco Chi Keung & Yarovaya, Larisa, 2016. "Media sentiment and CDS spread spillovers: Evidence from the GIIPS countries," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 50-59.
    5. Chang, Jung-Hsien & Hung, Mao-Wei & Tsai, Feng-Tse, 2015. "Credit contagion and competitive effects of bond rating downgrades along the supply chain," Finance Research Letters, Elsevier, vol. 15(C), pages 232-238.
    6. Wang, Zihe & Li, Johnny Siu-Hang, 2016. "A DCC-GARCH multi-population mortality model and its applications to pricing catastrophic mortality bonds," Finance Research Letters, Elsevier, vol. 16(C), pages 103-111.
    7. Balboa, Marina & López-Espinosa, Germán & Rubia, Antonio, 2015. "Granger causality and systemic risk," Finance Research Letters, Elsevier, vol. 15(C), pages 49-58.

    More about this item

    Keywords

    CDS spreads; Credit risk; Volatility spillovers; Financial crisis;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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