Financial Stress Transmission from Sovereign Credit Market to Financial Market: A Multivariate FIGARCH-DCC Approach

Abstract

This study examines the interdependence between the daily eurozone sovereign credit default swaps (CDS) index and four financial market sectors such as banking CDS market (CDSb), underlying sovereign market (BONDs), stock market (BMI) and future interest rate benchmark of the bunds obligation (EUROBOBL). Focusing on different phases of the sovereign debt crises, the aim of this article is to examine how the dynamics of correlations between the CDSs and financial market indicators evolved from 20 September 2011 to 12 February 2016. To this end, we adopt a dynamic conditional correlation (DCC) model into a multivariate fractionally integrated generalized ARCH (FIGARCH) framework, which accounts for long memory and time-varying correlations. The empirical findings indicate a general pattern of decrease and increase in correlations during the phases of the sovereign debt crisis, suggesting the spillover effect and different vulnerability of the CDS index and financial market indicators.

Eurozone Crisis and Banks’ Creditworthiness: What is New for Credit Default Swap Spread Determinants?

“…This fact can be briefly explained by the expression the doom-loop (Baldwin & Giavazzi, 2015), given by the fact that national governments are banks' lenders-of-last-resort and, at the same time, the latter is the major lenders to the governments. In more detail, this aspect has disclosed the 'two-way' interaction of riskiness between banks and countries (Abed, Boukadida, & Jaidane, 2019). This issue is particularly clear during bank bailout programmes, which have changed the composition of both banks' and sovereign balance sheets and, moreover, have affected the linkage between the default risk of the two sectors (Alter & Schüler, 2012).…”

Volatility Spillovers among Sovereign Credit Default Swaps of Emerging Economies and Their Determinants

“…In terms of corporations, the most impacted were those relying on bank loans and others more connected to governments. Furthermore, (Abed et al 2019) investigated the interconnection among sovereign CDSs of the Eurozone and the related financial markets, including banking CDSs, sovereign bonds, future interest rates, and stock markets, using an ARCH model from 2011 to 2016. The study spots a clear connection between sovereign CDSs and the financial markets regarding movements, especially during crises.…”

Spillover of Sentiments Between the GCC Stock Markets

“…They observe a significant impact of sentiments of developed markets on those of young, emerging markets. El Abed et al (2019) use a dynamic conditional correlation (DCC) framework which takes into account both long memory as well as time-varying correlation. Their findings exhibit a pattern of ups and downs in correlation during the occurrence of the Eurozone sovereign debt problems, suggesting the presence of spillover effect between the credit default swaps index and other financial instruments.…”