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The dynamics of spillover effects during the European sovereign debt turmoil

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  • Alter, Adrian
  • Beyer, Andreas

Abstract

In this paper we modify and extend the framework of Diebold and Yilmaz (2011) to quantify spillovers between sovereign credit markets and banks in the euro area. Spillovers are estimated recursively from a vector autoregressive model of daily changes in credit default swap (CDS) spreads with exogenous common factors. We account for interdependencies between sovereign and bank CDS spreads and derive generalized impulse response functions. Specifically, we assess the systemic effect of an unexpected shock to the creditworthiness of a sovereign or country-specific bank index on other sovereigns and bank CDSs between October 2009 and July 2012. Channels of shock transmission from or to sovereigns and banks are summarized in a Contagion Index and its four components: (i) among sovereigns, (ii) among banks, (iii) from sovereigns to banks, and (iv) from banks to sovereigns. We also highlight the impact of policy-related events on the Contagion Index.

Suggested Citation

  • Alter, Adrian & Beyer, Andreas, 2014. "The dynamics of spillover effects during the European sovereign debt turmoil," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 134-153.
  • Handle: RePEc:eee:jbfina:v:42:y:2014:i:c:p:134-153
    DOI: 10.1016/j.jbankfin.2014.01.030
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    Keywords

    Credit default swaps; Contagion; Sovereign debt; Systemic risk; Impulse responses;

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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