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Transmission of Sovereign Risk in the Euro CrisisFilippo BruttiUniversity of Zurich - Department of Eonomics; Swiss National Bank - Study Center Gerzensee Philip U. SauréSwiss National Bank - International Research and Technical Assistance Division March 1, 2012 Abstract: We assess the role of financial linkages in the transmission of sovereign risk in the Euro Crisis. Building on the narrative approach by Romer and Romer (1989), 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 10-percent decrease in the exposure to Greek debt reduces, on average, the transmission rate of sovereign risk by 9.4 percent. Decomposing these effects, we find that exposures to sovereign constitute significant transmission channels, while we find no robust support for transmission through bank-to-bank lending.
Number of Pages in PDF File: 66 Keywords: Cross-country Transmission, Sovereign Risk, Financial Linkages, Euro Crisis, Narrative Approach JEL Classification: F36, F42, F21, C30 working papers seriesDate posted: April 18, 2012 ; Last revised: February 20, 2013Suggested CitationContact Information
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