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The diabolical sovereigns/banks risk loop: A VAR quantile design

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  • Foglia, Matteo
  • Angelini, Eliana

Abstract

This article focuses on the tail risk spillover (co-movement) effect between the sovereign and banking sector in the eurozone, using a novel multivariate quantile model (VAR for VaR method) and then the relative pseudo quantile impulse response functions. We analysed the causality risk transmission at different quantiles (up/downside), using daily credit default swap from 9 October 2008 to 29 May 2018. Our main findings confirm the two-way causality between these credit markets, highlight the presence of an asymmetry in the mechanisms of shock transmissions between core and no core bank/sovereign, respectively. Also, we measure the directional predictability in the quantiles using the cross-quantilogram approach. The results suggest that a high credit risk sovereign predicts high sovereign risk (and vice versa).

Suggested Citation

  • Foglia, Matteo & Angelini, Eliana, 2020. "The diabolical sovereigns/banks risk loop: A VAR quantile design," The Journal of Economic Asymmetries, Elsevier, vol. 21(C).
  • Handle: RePEc:eee:joecas:v:21:y:2020:i:c:s1703494920300050
    DOI: 10.1016/j.jeca.2020.e00158
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    More about this item

    Keywords

    Credit default spread; Two-way feedback; Risk spillover; VAR for VaR; Cross-quantilogram; Sovereign-bank nexus;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

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