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Transmission of sovereign risk in the Euro crisis

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  • Brutti, Filippo
  • Sauré, Philip

Abstract

We assess the role of financial linkages for the transmission of sovereign risk in the Euro crisis. Building on the narrative approach by Romer and Romer (1989, 2010) and augmented by Mertens and Ravn (2013), we use financial news to identify structural shocks in a vector autoregressive model of daily sovereign CDS premia for eleven European countries. To estimate how these shocks transmit across borders, we use data on cross-country bank exposures to sovereign debt. Our results indicate that cross-border financial exposures constitute important transmission channels: a reduction of exposure to overall Greek debt by one standard deviation is associated with a reduction in the response of the sovereign CDS to a shock to Greek sovereign risk by about three quarter in the average country. Decomposing these effects, we find that exposures to sovereign debt constitute significant transmission channels, while we find no robust support for transmission through bank-to-bank lending.

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  • Brutti, Filippo & Sauré, Philip, 2015. "Transmission of sovereign risk in the Euro crisis," Journal of International Economics, Elsevier, vol. 97(2), pages 231-248.
    • Handle: RePEc:eee:inecon:v:97:y:2015:i:2:p:231-248
    DOI: 10.1016/j.jinteco.2015.03.009
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    More about this item

    Keywords

    Cross-country transmission; Sovereign risk; Financial linkages; Euro crisis narrative approach;
    All these keywords.

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General

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