Transmission of Government Default Risk in the Eurozone

Abstract

The paper develops an easy-to-apply test for contagion. In order to address the main challenge of any contagion test, that of endogeneity, the testing is conducted in the structural vector autoregression (SVAR) framework where we assume the reduced form errors follow a mixed-normal distribution. This distributional assumption enables us to use a recently developed SVAR model identification method with no need to restrict any of the instantaneous linkages between the variables. In the empirical part of the paper, we apply our test to the eurozone's ten years government bond spreads over Germany. In this maturity, the bond spreads mainly reflect governments' default risk. The years we consider are 2005--2010, and we find evidence of contagion in the spreads. Furthermore, it appears that, during the beginning of the euro debt crisis, there was transmission of government default risk from Greece to the other countries. However, Greece was not the only source country of contagion.JEL Classification: C1, C3, E4, F3, G1

Volatility co-movements and spillover effects within the Eurozone economies: A multivariate GARCH approach using the financial stress index

“…On the same time, the core is also an important channel of variance volatility transmission, both within the North European countries, but also towards the peripheral ones. Such a, somewhat surprising, result for part of the profession is in accordance to latest findings (Antonakakis and Vergos, 2013;Kohonen, 2014). Moreover, we find strong bidirectional effects between countries of the same group.…”

“…Another interesting paper is by Dajcman (2012), who uses a flight-to-quality indicator to examine the comovements of stock returns with bond yields for Germany and the most debt ridden Euro Area economies. The results, using a DCC modeling approach, are concurrent with Kohonen (2014) and Caporin et al (2013). Also, the flight-to-quality indicator has higher value prior to 2010, indicating increasing uncertainty for investors, who turned towards the safe haven of German Bunds.…”

“…Greek sovereign debt and Greek banks assets are sources of intensive transmission of risk. On the other hand, Kohonen (2014) uses ten-year government bond yield differentials for the peripheral Euro Area countries, again into a SVAR framework.…”

The Financial Connectedness Between Eurozone Core and Periphery: A Disaggregated View

“…VAR modeling is employed by some authors to analyze sovereign CDS for a number of European countries [Kohonen (2014) and Bruttin and Saure (2015)]. Antonakakis and Vergos (2013) show that each country's bond yields are mostly explained by their own forecast error variance.…”

Dependence between Stock Returns of Italian Banks and the Sovereign Risk

“…In particular, the relationship between sovereigns and the banking industry is still at the center of academic attention, and various papers have investigated different aspects of this issue (e.g., Baglioni and Cherubini (2013); Delis and Mylonidis (2011); Kalbaska and Gatkowski (2012); Kohonen (2014); Ugolini (2015a, 2015b); Xu et al (2017)). The current paper addresses the following three research questions: (1) Is there a statistically significant dependence between the sovereign default risk and the stock returns of Italian banks, especially in the period 2011-2013?…”