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Measuring Connectedness of Euro Area Sovereign Risk

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  • Rebekka Gätjen
  • Melanie Schienle

Abstract

We introduce a methodology for measuring default risk connectedness that is based on an out-of-sample variance decomposition of model forecast errors. The out-of-sample nature of the procedure leads to \realized" measures which, in practice, respond more quickly to crisis occurrences than those based on in-sample methods. The resulting relative and absolute connectedness measures find distinct and complementary information from CDS and bond yield data on European area sovereign risk. The detection and use of these second moment differences of CDS and bond data is new to the literature and allows to identify countries that impose risk on the system from those which sustain risk.

Suggested Citation

  • Rebekka Gätjen & Melanie Schienle, 2015. "Measuring Connectedness of Euro Area Sovereign Risk," SFB 649 Discussion Papers SFB649DP2015-019, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  • Handle: RePEc:hum:wpaper:sfb649dp2015-019
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    Cited by:

    1. Brůha, Jan & Kočenda, Evžen, 2018. "Financial stability in Europe: Banking and sovereign risk," Journal of Financial Stability, Elsevier, vol. 36(C), pages 305-321.
    2. repec:bla:apacel:v:32:y:2018:i:1:p:29-44 is not listed on IDEAS
    3. Buse, Rebekka & Schienle, Melanie & Urban, Jörg, 2019. "Effectiveness of policy and regulation in European sovereign credit risk markets: A network analysis," Working Paper Series in Economics 125, Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering.
    4. repec:spr:decisn:v:45:y:2018:i:4:d:10.1007_s40622-018-0196-6 is not listed on IDEAS
    5. repec:prg:jnlpol:v:2018:y:2018:i:3:id:1193:p:366-383 is not listed on IDEAS

    More about this item

    Keywords

    Sovereign risk measurement; variance decomposition; connectedness; CDS and bond spreads; financial and eurozone crisis;

    JEL classification:

    • 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
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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