Sovereigns and Banks in the Euro Area: A Tale of Two Crises

50 Pages Posted: 13 Jan 2015

See all articles by Marta Gómez-Puig

Marta Gómez-Puig

Economic Theory Department. University of Barcelona

Simon Sosvilla-Rivero

UCM Institute for Economic Analysis

Manish Singh

University of Barcelona; Indira Gandhi Institute of Development Research (IGIDR)

Date Written: January 07, 2015

Abstract

This study attempts to identify and trace inter-linkages between sovereign and banking risk in the euro area. To this end, we use an indicator of banking risk in each country based on the Contingent Claim Analysis literature, and 10-year government yield spreads over Germany as a measure of sovereign risk. We apply a dynamic approach to testing for Granger causality between the two measures of risk in 10 euro area countries, allowing us to check for contagion in the form of a significant and abrupt increase in short-run causal linkages. The empirical results indicate that episodes of contagion vary considerably in both directions over time and within the different EMU countries. Significantly, we find that causal linkages tend to strengthen particularly at the time of major financial crises. The empirical evidence suggests the presence of contagion, mainly from banks to sovereigns.

Keywords: Sovereign debt crisis, banking crisis, Granger-causality, time-varying approach, “distance-to-default”, euro area.

JEL Classification: C22, E44, G01, G13, G21

Suggested Citation

Gómez-Puig, Marta and Sosvilla-Rivero, Simon and Singh, Manish, Sovereigns and Banks in the Euro Area: A Tale of Two Crises (January 07, 2015). Available at SSRN: https://ssrn.com/abstract=2548460 or http://dx.doi.org/10.2139/ssrn.2548460

Marta Gómez-Puig

Economic Theory Department. University of Barcelona ( email )

Diagonal 690
Barcelona, 08034
Spain
34-93-4020113 (Phone)
34-93-4039082 (Fax)

Simon Sosvilla-Rivero (Contact Author)

UCM Institute for Economic Analysis ( email )

Carretera de Humera s/n
Madrid, Madrid 28223
Spain
+34913932626 (Phone)

HOME PAGE: http://www.ucm.es/info/ecocuan/ssr/

Manish Singh

University of Barcelona ( email )

Gran Via de les Corts Catalanes, 585
Barcelona, 08007
Spain

Indira Gandhi Institute of Development Research (IGIDR) ( email )

Gen A.K. Vaidya Marg Santoshnagar
Goregaon (East)
Mumbai, Maharashtra 400065
India

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