An Anatomy of Credit Risk Transfer between Sovereign and Financials in the Eurozone Crisis

Journal of International Financial Markets, Institutions & Money, Forthcoming

41 Pages Posted: 23 Dec 2015

See all articles by Anurag Narayan Banerjee

Anurag Narayan Banerjee

Durham Business School

Chi-Hsiou Daniel Hung

University of Glasgow - Adam Smith Business School

Kai Lisa Lo

Shanghai University of Finance and Economics - Department of Finance

Date Written: December 14, 2015

Abstract

In this paper we assess the effectiveness of large scale bailouts aiming at preventing a financial crisis from further propagating into a systemic risk. We examine the structural changes in the relationship between the sovereign and financial institutions’ credit default swap spreads during the European sovereign debt crisis. Before the first Greek bailout by the EFSF, the sovereign and financial sectors exhibit a two-way feedback effect for both the short and the long runs. Crucially, we find that after the first Greek bailout, shocks in the financial sector either exert significantly negative impacts or lose influences on the sovereign sector. In contrast, all the later bailouts by the EFSF (the second Greek bailout, Irish and Portugal bailouts) do not show this pattern change in the two-way risk transfer relationship.

Keywords: Credit Default Risk, CDS Spreads, Sovereign Debt, Financial Institutions, European Financial Stability Facility (EFSF)

JEL Classification: E02, G01, G13, G20, G28

Suggested Citation

Banerjee, Anurag Narayan and Hung, Chi-Hsiou Daniel and Lo, Kai Lisa, An Anatomy of Credit Risk Transfer between Sovereign and Financials in the Eurozone Crisis (December 14, 2015). Journal of International Financial Markets, Institutions & Money, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2707661

Anurag Narayan Banerjee

Durham Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

Chi-Hsiou Daniel Hung (Contact Author)

University of Glasgow - Adam Smith Business School ( email )

Gilbert Scott Building
University of Glasgow
Glasgow, Scotland G12 8QQ
United Kingdom

Kai Lisa Lo

Shanghai University of Finance and Economics - Department of Finance ( email )

Shanghai, 200433
China

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