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Sovereign, Bank and Insurance Credit Spreads: Connectedness and System Networks

38 Pages Posted: 18 Aug 2014

See all articles by Monica Billio

Monica Billio

Dipartimento di Economia; University of Venice - Department of Economics

Mila Getmansky Sherman

University of Massachusetts at Amherst - Eugene M. Isenberg School of Management - Department of Finance

Dale F. Gray

International Monetary Fund (IMF); MF Risk

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering

Robert C. Merton

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Harvard Business School - Finance Unit

Loriana Pelizzon

Faculty of Economics and Business Administration; Leibniz Institute for Financial Research SAFE; Dipartimento di Economia

Date Written: June 4, 2014

Abstract

Macrofinancial risk has become increasingly important over time as global markets have become increasingly more connected. We apply several econometric measures of connectedness based on Granger-causality networks to the changes of sovereign risk of European countries and credit risk of major European, U.S., and Japanese banks and insurers to investigate the evolution of these connections. Credit risk for banks and insurers is measured using a version of the Merton Model (Contingent Claims Analysis) applied to risk-adjusted balance sheets. We highlight connections among banks, insurers, and sovereigns by quantifying the effects of risk transmission within and across countries and financial institutions.

Keywords: Sovereign and Credit Risk; Financial Institutions; Liquidity; Financial Crises; Contingent Pricing

JEL Classification: G13 and G2

Suggested Citation

Getmansky Sherman, Mila and Billio, Monica and Gray, Dale F. and Lo, Andrew W. and Merton, Robert C. and Pelizzon, Loriana, Sovereign, Bank and Insurance Credit Spreads: Connectedness and System Networks (June 4, 2014). Available at SSRN: https://ssrn.com/abstract=2481660

Monica Billio

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

HOME PAGE: http://www.unive.it/persone/billio

University of Venice - Department of Economics ( email )

Fondamenta San Giobbe 873
Venezia 30121
Italy
+39 041 234 9170 (Phone)
+39 041 234 9176 (Fax)

Mila Getmansky Sherman (Contact Author)

University of Massachusetts at Amherst - Eugene M. Isenberg School of Management - Department of Finance ( email )

Amherst, MA 01003-4910
United States

Dale F. Gray

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

MF Risk

5921 Searl Terrace
Bethesda, MD 20816

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering ( email )

100 Main Street
E62-618
Cambridge, MA 02142
United States
617-253-0920 (Phone)
781 891-9783 (Fax)

HOME PAGE: http://web.mit.edu/alo/www

Robert C. Merton

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Avenue
E62-634
Cambridge, MA 02139-4307
United States
617 715 4866 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6678 (Phone)

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, D-60323
Germany

Leibniz Institute for Financial Research SAFE ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

HOME PAGE: http://www.safe-frankfurt.de

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

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