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What’s Mine Is Yours: Sovereign Risk Transmission during the European Debt Crisis

Author

Listed:
  • Matthew Greenwood-Nimmo

    (Department of Economics, The University of Melbourne)

  • Viet Hoang Nguyen

    (Melbourne Institute: Applied Economic and Social Research, The University of Melbourne)

  • Yongcheol Shin

    (Department of Economics and Related Studies, University of York)

Abstract
We develop an empirical network model to study bilateral sovereign credit risk spillovers during the European debt crisis. We show that the spillover density is typically asymmetric with heavy tails. This confounds efforts to track time-variation in spillover activity using the mean-based summary statistics that are widespread in the literature. Density-based measures — specifically divergence criteria — yield stronger and timelier signals of changes in spillover activity than mean-based measures. This is particularly apparent for sovereign bailouts, which principally affect the tails of the spillover density. Consequently, densitybased measures provide valuable additional information about changes in the credit risk environment.

Suggested Citation

  • Matthew Greenwood-Nimmo & Viet Hoang Nguyen & Yongcheol Shin, 2017. "What’s Mine Is Yours: Sovereign Risk Transmission during the European Debt Crisis," Melbourne Institute Working Paper Series wp2017n17, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    • Handle: RePEc:iae:iaewps:wp2017n17
    as

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    File URL: http://melbourneinstitute.unimelb.edu.au/__data/assets/pdf_file/0008/2417597/wp2017n17.pdf
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Bettendorf, Timo & Heinlein, Reinhold, 2019. "Connectedness between G10 currencies: Searching for the causal structure," Discussion Papers 06/2019, Deutsche Bundesbank.
    2. Aharon, David Y. & Umar, Zaghum & Aziz, Mukhriz Izraf Azman & Vo, Xuan vinh, 2022. "COVID-19 related media sentiment and the yield curve of G-7 economies," The North American Journal of Economics and Finance, Elsevier, vol. 61(C).
    3. Boeckelmann Lukas & Stalla-Bourdillon Arthur, 2021. "Structural Estimation of Time-Varying Spillovers: An Application to International Credit Risk Transmission," Working papers 798, Banque de France.
    4. Greenwood-Nimmo, Matthew & Tarassow, Artur, 2022. "Bootstrap-based probabilistic analysis of spillover scenarios in economic and financial networks," Journal of Financial Markets, Elsevier, vol. 59(PA).
    5. Hernandez, Jose Arreola & Shahzad, Syed Jawad Hussain & Sadorsky, Perry & Uddin, Gazi Salah & Bouri, Elie & Kang, Sang Hoon, 2022. "Regime specific spillovers across US sectors and the role of oil price volatility," Energy Economics, Elsevier, vol. 107(C).
    6. Mardi Dungey & John Harvey & Pierre Siklos & Vladimir Volkov, 2017. "Signed spillover effects building on historical decompositions," CAMA Working Papers 2017-52, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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    More about this item

    Keywords

    Sovereign credit risk; credit default swaps (CDS); network models and connectedness; spillover density; divergence criteria;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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