Interdependence between Sovereign and Bank CDS Spreads in Eurozone during the European Debt Crisis - The PSI Effect

Michalis-Panayiotis Papafilis (), Maria Psillaki and Dimitris Margaritis

MPRA Paper from University Library of Munich, Germany

Abstract: This paper examines the changes in the interdependence between sovereign and bank credit risk, that were noticed, after the announcement of the voluntary exchange program of Greek bonds, with the participation of the private sector (Private Sector Involvement - PSI). More precisely, we investigate the progress of the credit default swaps (CDS) of eight eurozone countries and of twenty-one banking institutions, for the period of January 2009 to May 2014. We divide the sample into two sub-periods, based on the announcement of the program. We apply Hsiao's methodology (1981), in order to ascertain the causality which is observed between the CDS series and potential changes in their relationship, due to the implementation of the PSI. We identify limited causality relations between countries and banks of the sample examined, in the second sub-period, while the size of the interaction is reduced in the same period. After developing a Difference-in-Difference model, we confirm the weakening of causal relationships between the CDS series studied, for the period, after the announcement of the PSI. Our results suggest that the implementation of the PSI has contributed to the limitation of the interdependence between the CDS spreads of the sovereigns and banks in the period that follows.

Keywords: CDS spreads; PSI; sovereign credit risk; bank credit risk; debt crisis; contagion; eurozone (search for similar items in EconPapers)
JEL-codes: F34 F42 G28 H12 H63 (search for similar items in EconPapers)
Date: 2015-11-24
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cfn and nep-eec
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