An Anatomy of Credit Risk Transfer between Sovereign and Financials in the Eurozone Crisis

Banerjee, A.; Hung, C-H.D.; Lo, K.L.

Abstract

In this paper we assess the effectiveness of large scale bailouts aiming at preventing a financial crisis from further propagating into a systemic risk. We examine the structural changes in the relationship between the sovereign and financial institutions’ credit default swap spreads during the European sovereign debt crisis. Before the first Greek bailout by the European Financial Stability Facility (EFSF), the sovereign and financial sectors exhibit a two-way feedback effect for both the short and the long runs. Crucially, we find that after the first Greek bailout, shocks in the financial sector either exert significantly negative impacts or lose influences on the sovereign sector. In contrast, all the later bailouts by the EFSF (the second Greek bailout, Irish and Portugal bailouts) do not show this pattern change in the two-way risk transfer relationship.

Citation

Banerjee, A., Hung, C., & Lo, K. (2016). An Anatomy of Credit Risk Transfer between Sovereign and Financials in the Eurozone Crisis. Journal of International Financial Markets, Institutions and Money, 41, 102-120. https://doi.org/10.1016/j.intfin.2015.12.007

• Journal Article Type: Article
• Acceptance Date: Dec 23, 2015
• Online Publication Date: Dec 31, 2015
• Publication Date: Mar 1, 2016
• Deposit Date: Jan 26, 2016
• Publicly Available Date: Dec 31, 2016
• Journal: Journal of International Financial Markets, Institutions and Money
• Print ISSN: 1042-4431
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 41
• Pages: 102-120
• DOI: https://doi.org/10.1016/j.intfin.2015.12.007
• Keywords: Eurozone crisis, Credit default risk, Credit default swap spread, Sovereign debt, Financial institutions, European Financial Stability Facility, Bailout.
• Public URL: https://durham-repository.worktribe.com/output/1390965