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Banks and Sovereigns: Did adversity bring them closer?

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Listed:
  • T. Flavin

    (Departmtent of Economics Finance and Accounting, National University of Ireland, Maynooth)

  • M.Dongey

    (University of Tasmania)

  • L. Sheenan

    (Queens University Belfast.)

Abstract

We analyse the stability of the cross-market shock transmission mechanism between banks and sovereign bonds during the Eurozone sovereign debt crisis for crisis-hit periphery countries and Germany. We also examine the shock propagation of banking shocks and sovereign bond shocks between domestic and external markets. Using a Markov-switching framework, we find strong evidence of bilateral contagion between banks and sovereign bonds and also between domestic and external banking sectors. Sovereign bond markets are different. An external shock only produces contagious effects in Greece, who were largely dependent on external aid. For all the others, external shocks lead to decoupling as investors became increasingly discerning in their perception of the debt instruments issued by different Eurozone states.

Suggested Citation

  • T. Flavin & M.Dongey & L. Sheenan, 2020. "Banks and Sovereigns: Did adversity bring them closer?," Economics Department Working Paper Series n307-20.pdf, Department of Economics, National University of Ireland - Maynooth.
  • Handle: RePEc:may:mayecw:n307-20.pdf
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    More about this item

    Keywords

    Sovereign bonds; Debt crisis; Banking crisis; Eurozone; Markov-switching VAR.;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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