The Dynamics of Spillover Effects during the European Sovereign Debt Turmoil

43 Pages Posted: 31 Oct 2012 Last revised: 20 Feb 2013

See all articles by Adrian Alter

Adrian Alter

International Monetary Fund

Andreas Beyer

European Central Bank (ECB)

Date Written: February 8, 2013

Abstract

In this paper we develop empirical measures for the strength of spillover effects. Modifying and extending the framework by Diebold and Yilmaz (2011), we quantify spillovers between sovereign credit markets and banks in the euro area. Spillovers are estimated recursively from a vector autoregressive model of daily CDS spread changes with exogenous common factors. We account for interdependencies between sovereign and bank CDS spreads and we derive generalised impulse response functions. Specifically, we assess the systemic effect of an unexpected shock to the creditworthiness of a particular sovereign or country-specific bank index to other sovereign or bank CDSs focusing on the period between October 2009 and July 2012. Channels of transmission from or to sovereigns and banks are aggregated to produce a Contagion index (CI). This index is disentangled into four components, the average potential spillover: i) amongst sovereigns, ii) amongst banks, iii) from sovereigns to banks, and iv) vice-versa. We highlight the impact of policy related events along the different components of contagion index. The systemic contribution of each sovereign or banking group is quantified as the net spillover weight in the total net-spillover measure. Finally, the captured time-varying interdependence between banks and sovereigns emphasises the evolution of their strong nexus.

Keywords: CDS, contagion, sovereign debt, systemic risk

JEL Classification: C58, G01, G18, G21

Suggested Citation

Alter, Adrian and Beyer, Andreas, The Dynamics of Spillover Effects during the European Sovereign Debt Turmoil (February 8, 2013). Available at SSRN: https://ssrn.com/abstract=2168659 or http://dx.doi.org/10.2139/ssrn.2168659

Adrian Alter (Contact Author)

International Monetary Fund ( email )

700 19th St NW
Washington, DC 20431
United States

Andreas Beyer

European Central Bank (ECB) ( email )

Eurotower
Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany
+49 69 1344 6468 (Phone)
+44 69 1344 6000 (Fax)

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