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Structural Estimation of Time-Varying Spillovers: An Application to International Credit Risk Transmission

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  • Boeckelmann Lukas
  • Stalla-Bourdillon Arthur

Abstract

We propose a novel approach to quantify spillovers on financial markets based on a structural version of the Diebold-Yilmaz framework. Key to our approach is a SVAR-GARCH model that is statistically identified by heteroskedasticity, economically identified by maximum shock contribution and that allows for time-varying forecast error variance decompositions. We analyze credit risk spillovers between EZ sovereign and bank CDS. Methodologically, we find the model to better match economic narratives compared with common spillover approaches and to be more reactive than models relying on rolling window estimations. We find, on average, spillovers to explain 37% of the variation in our sample, amid a strong variation of the latter over time.

Suggested Citation

  • Boeckelmann Lukas & Stalla-Bourdillon Arthur, 2021. "Structural Estimation of Time-Varying Spillovers: An Application to International Credit Risk Transmission," Working papers 798, Banque de France.
    • Handle: RePEc:bfr:banfra:798
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    2. Julio Gálvez, 2021. "Measuring interconnectedness across institutions and sectors," Financial Stability Review, Banco de España, issue Autumn.
    3. Julio Gálvez, 2021. "Measuring interconnectedness across institutions and sectors," Revista de Estabilidad Financiera, Banco de España, issue Otoño.
    4. Tristan Jourde, 2022. "The Rising Interconnectedness of the Insurance Sector," Working papers 857, Banque de France.
    5. Julio Gálvez, 2021. "Measuring interconnectedness across institutions and sectors," Financial Stability Review, Banco de España, issue Autumn.

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    More about this item

    Keywords

    CDS; spillover; sovereign debt; systemic risk; SVAR; identification by heteroskedasticity;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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