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The changing international network of sovereign debt and financial institutions

We develop a theoretical and empirical framework for the connections between global financial and sovereign CDS markets. The transmission of shocks is shown to affect the systemic default probability of the international network. The network is found to be "robust but fragile", meaning that a shock can result in the propagation of crises. Between 2003 and 2013, the probability of default in the network in the face of potentially poor investment outcomes and/or sovereign bond haircuts changes sub-stantially. The results suggest that it is the interconnectedness of the financial and sovereign debt markets that provides increased protection against financial fragility.

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File URL: http://eprints.utas.edu.au/23500/1/2017_04_Dungey_Harvey_Volkov.pdf
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Paper provided by University of Tasmania, Tasmanian School of Business and Economics in its series Working Papers with number 2017-04.

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Length: 49 pages
Date of creation: 2017
Publication status: Published by the University of Tasmania. Discussion paper 2017-04
Handle: RePEc:tas:wpaper:23500
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Web page: http://www.utas.edu.au/business-and-economics

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