31 Pages Posted: 31 Mar 2012
Date Written: February 2012
We investigate the comovement between sovereign and bank credit risk in the Euro area over the period 2008-2010. We construct two synthetic credit risk measures of the European sovereign and banking sectors that can be used for macro-prudential supervision. We estimate a Vector error-correction model and we obtain empirical evidence of a cointegration relationship between sovereign and bank credit risk. Moreover, we find that deviations from this equilibrium relationship are adjusted through the banking sector. Finally, impulse response functions show that it is possible to distinguish between a permanent sovereign shock and a transitory banking shock.
Keywords: financial stability, sovereign sector credit risk, banking sector credit risk, nth-to-default CDS, portfolio credit risk management
JEL Classification: E44, E58, E62, G10, G20
Suggested Citation: Suggested Citation
Nucera, Federico, The Comovement between Sovereign and Bank Credit Risk During the Financial Crisis: The Case of the Euro Area (February 2012). Available at SSRN: https://ssrn.com/abstract=2032012 or http://dx.doi.org/10.2139/ssrn.2032012