Systemic risk and the sovereign-bank default nexus: a network vector autoregression approach

ABSTRACT Using the generalized value-at-risk method of Diebold and Yilmaz in their 2009;paper "Measuring financial asset return and volatility spillovers, with application to;global equity markets" to measure the degree of spillover, we propose a metric for the;systemic risk of a market. The metric considers the distribution of the impact to and;from a market. This coskewness measure identifies key markets that play a central;role in transmission across the market as a whole.We apply this method to detail the;linkages between European Union (EU) sovereign bond markets and twenty major;EU banks over time since 2000.We show that fiscal problems in Spain are transmitted;via its internationally developed banking sector to the rest of Europe. This spillover;has increased substantially since the outbreak of the crisis in the eurozone in May;2010. European Economic and Monetary Union-wide solutions have looked to stem;the effects of ailing banking sectors and bad public finances as well as break the doom;loop between banks and sovereigns. The creation of the European Financial Stability;Facility and the European Stability Mechanism, in addition to European Central Bank;action, has helped to decouple the situation of Spanish public finances from those of;EU banks.