The Impact of Sovereign Shocks

52 Pages Posted: 17 Nov 2014 Last revised: 26 Jan 2018

Gerardo Manzo

AQR Capital Management

Antonio Picca

University of Chicago - Booth School of Business

Date Written: January 1, 2018

Abstract

We study the dynamic propagation mechanisms of systemic risk shocks within and across macro-systems of governments and financial institutions. We propose a novel approach to identify relevant systemic shocks and to classify them into sovereign or banking categories. We find that sovereign shocks have a significant and persistent impact on the probability of a collective banking default. We also explore channels through which these shocks propagate, and find that countries' fiscal fragility as well as banking exposure to these countries are relevant mechanisms of shock transmission.

Keywords: Systemic Risk, Contagion Risk, Banking Risk, Sovereign Risk, Fiscal Fragility, Narrative Approach

JEL Classification: E44, E50, G21, G28

Suggested Citation

Manzo, Gerardo and Picca, Antonio, The Impact of Sovereign Shocks (January 1, 2018). Available at SSRN: https://ssrn.com/abstract=2524991 or http://dx.doi.org/10.2139/ssrn.2524991

Gerardo Manzo (Contact Author)

AQR Capital Management ( email )

Greenwich, CT
United States

Antonio Picca

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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