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Effectiveness of policy and regulation in European sovereign credit risk markets: a network analysis

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  • Buse, Rebekka
  • Schienle, Melanie
  • Urban, Jörg

Abstract

We study the impact of changes in regulations and policy interventions on systemic risk among European sovereign entities measured as volatility spillovers in respective credit risk markets. Our unique intraday CDS dataset allows for precise measurement of the effectiveness of these events in a network setting. In particular, it allows discerning interventions which entail significant changes in network cross-effects with appropriate bootstrap confidence intervals. We show that it was mainly regulatory changes with the ban of trading naked sovereign CDS in 2012 as well as the new ISDA regulations in 2014 which were most effective in reducing systemic risk. In comparison, we find that the effect of policy interventions was minor and generally not sustainable. In particular, they only had a significant impact when implemented for the first time and when targeting more than one country. For the volatility spillover channels, we generally find balanced networks with no fragmentation over time. JEL Classification: G20, G01, G17, C32, C55, G28

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  • Buse, Rebekka & Schienle, Melanie & Urban, Jörg, 2019. "Effectiveness of policy and regulation in European sovereign credit risk markets: a network analysis," ESRB Working Paper Series 90, European Systemic Risk Board.
    • Handle: RePEc:srk:srkwps:201990
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    More about this item

    Keywords

    bootstrap spillover-measures; financial crises; financial stability and systemic risk in the eurozone; high-frequency cds; policy and regulation;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • 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
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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